All the responsibilities of the franchisee and the franchisor are set out in detail in the franchise agreement. It is important for both parties to understand this legal document thoroughly before they sign it. Some of the more important aspects to consider are discussed below.
The franchise agreement is a legally binding document and all clauses must be carefully considered so that the parties understand the legal implications of breaking the agreement. It is therefore important that franchisees seek an independent legal opinion on the various responsibilities stipulated in the agreement. The franchise agreement considers key matters such as intellectual property, the protection of personal information, trademarks, consumer rights and restraints of trade. Many potential profitable operations have faltered because franchisees did not understand the implications of all the legal clauses in the franchise agreement. It is critical that franchise agreements are fair and beneficial for both the franchisee and the franchisor. Similar to the franchise agreement, franchisees are encouraged to seek legal advice prior to entering into a lease agreement and supplier agreements.
The franchisor is responsible for the facilitation of initial training and ongoing upskilling of franchisees. Training generally incorporates theoretical classroom training, as well as on-the-job practical training to ensure the effective implementation of learnings in the daily operations of the business. Training should also cover compliance matters such as occupational health and safety. It is important that the franchise ensures that all staff are trained at the prescribed intervals and at standards for the particular franchise brand.
Financial obligations are usually well understood by both parties. This is because ultimately a franchise is a business run for the mutual financial gain of all parties. Financial obligations payable to the franchisor include once-off fees as well as ongoing costs. Once-off financial obligations include the upfront joining fees and the initial setup or purchase cost. Ongoing costs payable by franchisees include monthly royalty fees and marketing fees as a percentage of turnover, a fixed amount or a volume based scaled amount. Franchisees should also consider operational expenses such as leasing costs of premises, equipment and vehicle hire, staffing costs, stock purchases, accounting fees and loan repayments.
Franchisees contribute monthly towards a national marketing fund, which is managed by the franchisor. This makes provision for overall ongoing brand development and awareness. According to 2016 Franchise Association South Africa statistics, the average percentage marketing fee being contributed is 2.3% of the franchisee’s monthly turnover.
In addition to the national marketing fund, franchise owners are obligated to participate in and assist with local area marketing for their stores. This may entail getting involved with local community programmes, schools and sporting events. It is important for franchisees to understand their responsibility to increase public awareness of their stores and ultimately grow the performance of their store.
It is important that franchisors have a considered approach towards setting up new stores to avoid territorial conflict and cannibalisation among franchisees. Franchisees are generally allocated a specific radius within which to trade as stipulated in their franchise agreement. This could be dependent on several factors, including demographic density, sub-sectors and brand rules. This franchisee would either have exclusivity within that area or first right of refusal should a new store be justified. It is important that this part of the agreement is well understood as disputes can arise if franchises are too close to each other.
New franchise owners must understand all the obligations of joining a franchise network and the knowledge of all obligations, legal and otherwise, should form part of a proper due diligence process.
*by Laurette Pienaar, Nedbank National Franchise Manager. For more email: email@example.com.