Franchise agreement

About this franchise agreement

Manufacturers do not usually create franchises of retailers for their products. Usually it suits both sides for aretailer to take full charge of how the products are sold. However, if the sales service is important to the product brand then a franchise agreement such as this one could be used.

Examples could include:

• Where the retailer uses the intellectual property of the manufacturer (for example, the retailer only sells the products of the franchisor, and does so from a shop branded with the franchisor's name);
• Where the retail experience is important in maintaining the brand (where buying the goods becomes an event in itself);
• Where the product requires customisation at the point of sale (for example, custom fitting of technical clothing);
• Where the product requires regular servicing or other after sales support that would be impractical for the manufacturer or an agent to carry out, yet requires specialist product knowledge;
• Where the manufacturer needs to retain control over aspects of the retail operation (such as having access to customer information).

The agreementcovers an enormous number of issues important to franchising. We believe it is comprehensive enough to be used by the largest franchise chains. For smaller businesses, it should be an ideal basis from which to craft an agreement that not only protects the rights of the franchisor, but also impresses prospective franchisees.

We would expect this agreement to be used by a solicitor or other franchise advisor. However, because the key to drawing a good franchise agreement relies on knowing the nuts and bolts of how the business works (rather than knowing complicated law), a business owner could also use it with ease. Use of plain English makes every sentence clear.

Should you be buying an agreement from an on-line retailer?

The advice from the largest association of franchisors in the Republic of South Africa, the Franchise Association of South Africa (the FASA), is that you shouldn’t use an advisor who isn’t a paid subscriber to their association. That advice extends to franchise agreements bought from online retailers. This isn’t impartial advice. The trade association is comprised of experienced and knowledgeable people, but it is a private company, commercially operated to promote and to protect the financial interests of its subscribers.

There is no additional qualification required to practice franchise law, just as there isn’t to being able to draw a lease. Commercial experience is the important quality to seek.

When it comes to selecting a franchise agreement from an online retailer, we suggest that you look at templates from several different suppliers in order to evaluate which one is most comprehensive and suits you best. Templates are not expensive compared to the cost of a solicitor's time, and the benefit to your business of getting your franchise agreement right is enormous. Bear in mind that a short agreement,regardless of where it is bought, is unlikely to protect your business sufficiently,not because the law relating to franchising is overwhelmingly complex, but rather because the practical considerations of how the franchise will work require more than a few pages to record them.

The Franchise Association of South Africa promotes ethical franchising. We agree with this, not as a matter of philosophy but because a successful franchisor is one who helps his franchisees to create profitable businesses while he expands his own. Your franchise agreement has to form the basis of a sound and profitable deal for both sides.

The law in this franchise agreement

From 31 March 2011, the Consumer Protection Act 2008 (CPA) and its regulations substantially changed the manner in which South African law regulates franchise arrangements. The legislation devotes several pages to the rights and duties of franchisors and franchisees, the prescribed content for franchise agreements, and the inclusion of international best practice standards which require proper disclosure to franchisees.

Businesses for which this franchise agreement would be suitable

This franchise agreement has been drawn for use where:

• The franchisee predominantly sellsgoods, possibly with additional services;
• The end customers are businesses or consumers.

Examples of businesses that could use this agreement include those:

• Where a retailer trades under the name of the franchisor, and the franchisor wishes to retain control over the retail experience (for example, the shop layout or how a customer is served) in order to protect the brand and/or to promote a similar customer experience across all retail outlets.

• This is a common model for many high street retailers, whether or not the franchisor is a sole manufacturer of all the stock, or is just a distributor. Examples include French patisserie chains to sports clothing shops.
• This agreement could be used where the goods will be sold in a concession. The concession could be run by a franchisee independent to the rest of the shop (such as in a department store) or by the owner of the shop as a separate business unit (allowing the owner to be a specialist stockist for the franchisor while offering the products of other companies as well).

• Where the franchisor wishes to own, or have access to, the intellectual property of the retailer (for example, access to customer information).
• Where the product requires additional service to bring it into use or maintain it, and the franchisor is unable to provide this service himself.

• An example of a business that requires the product to be customised is specialist sports equipment (such as ski boots), where it would be impractical for the customer to visit the manufacturer to be fitted.
• An example of a business that requires the product to be serviced would be a home cleaning robot retailer, where the product is unusual and sophisticated and requires maintenance by a specialist.

The agreement is comprehensive enough to be used by a business of any size, but we assume that the business will be small or medium sized, perhaps with several established branches already. The franchisor may be new to franchising, or may be looking to extend into the Republic of South Africa.

The franchise territory can be of any size, from part of a town to a continent. Generally, it is more advantageous to the franchisor to keep the area small and grant licenses to operate in additional areas to the same franchisee later.

The agreement does not cover ownership and lease of property (premises) by the franchisor. The agreement assumes that the franchisee will own or let the premises outside of this agreement either from the franchisor or someone else if required.

Agreement features and benefits

We have given the buyer of this document a large degree of control over what the franchisor will give and what the franchisee will do in return.

We have included the usual provisions such as:

• Use of trademarks and intellectual property;
• Provision of marketing and marketing materials;
• Provison of cancellation of agreement;
• Development of public relations and promotional campaigns;
• Training and support;
• Sourcing materials.

Protection of his investment is likely to be very important to a franchisee. The agreement covers this in detail, from franchise renewal rights, transfer with pre-emption to intellectual property that the franchisee might create. These should provide fair terms that incentivise the franchisee and allow him to benefit from having built up his franchise without the franchisor relinquishing too many rights.

Agreement contents

This is one of the longest Net Lawman documents with 31 pages (excluding guidance).

The contents include the following paragraphs:

• Warranties that the franchisee is able to take on the franchise;
• Grant of franchise;
• Obligations of the franchisor to the franchisee: both initially and on-going;
• Fees and payment terms;
• Rights to renewal;
• Data Protection law compliance;
• Franchisee’s undertakings;
• Transfer terms: including pre-emption rights for the franchisor to acquire the business;
• Terms relating to the corporate structure of the franchisee;
• Termination: rights to terminate the agreement and process for termination;
• Insurance;
• Cooling off period;
• Risk and retention of title;
• Use of subcontractors;
• Intellectual property rights: extensive provision for the protection of the franchisor's property;
• Confidentiality;
• Limitation of liability;
• Publicity;
• Indemnity;
• Dispute resolution;
• Other legal paragraphs to protect your interests.