Information is franchisees' best friend in agreement with franchisors

…the local industry was completely unregulated and franchisees were heavily dependent on the franchisor, which had a lot of power. "It's all about the contract that you sign," she said. "Although the law treats the franchisor and the franchisee as equal … there is only one person who is in charge."
July 10, 2008

Information is franchisees' best friend in agreement with franchisors
Slindile Khanyile

Durban - The proposed Consumer Protection Bill needed to be specific about the information that a franchisor had to disclose to ensure that franchisees were not abused, Tanya Woker, a professor of law at the University of KwaZulu-Natal, said this week.

Woker, who has researched franchising for five years, said the local industry was completely unregulated and franchisees were heavily dependent on the franchisor, which had a lot of power.

"It's all about the contract that you sign," she said. "Although the law treats the franchisor and the franchisee as equal … there is only one person who is in charge."

The bill, which introduces various requirements that will change the way consumers are treated in business dealings - such as disclosure of material information - is before parliament and should be passed before the end of the year.

The Franchising Association of SA (Fasa) suggests that its franchisor members use its disclosure document, but it does not compel them to do so.

Franchising is seen as a safe way to enter business, particularly for first-time entrepreneurs, who buy into tried and tested business models instead of starting from scratch.

The rewards could be fantastic in a deal with a good franchisor who acted in good faith, watched market trends and advertised, while the franchisee concentrated on growing the business, said Woker.

But it appears that this is not always the case. Last week, former Mr Video franchisees, whose ventures were unsuccessful, blamed the franchisor and said the contract was designed to set them up for failure.

According to the Standard Bank Franchise Factor, compiled in 2006 by Bendeta Gordon of Franchize Directions, franchising contributes 12 percent to gross domestic product. There are 470 franchisors, 25 870 business units and the sector employs 412 428 people.

Elana Koral, the head of consulting at Franchize Directions, said it was hard to believe that a franchisor would, with premeditation, want to destroy a franchisee, as each franchise that closed injured the brand.

Koral said although Fasa did its best to get subscribing franchisors to abide by its code of ethics, it was both voluntary and unlegislated. "This naturally poses a risk to prospective franchisees, as there are no scrupulous requirements demanded of franchisors."

Franchise agreements would inherently be biased towards the franchisor, as it was investing its intellectual property and entrusting the image of its brand to third parties, she said.

"Anything that is grossly unfair will often be ruled out anyway by the competition commission's regulations. It is wise for a franchisee to get counsel before signing the franchisee agreement, to ensure his or her rights are being met according to legal norms," said Koral.

Carlo Gonzaga, the chief executive of Taste Holdings, which owns the Scooters Pizza and Maxi's brands, said one of the things that would make a franchise succeed or fail would be how much consumer appeal the concept had.

"The concept must also have some unique differentiation that will make the brand stand out, because it is easy to copy a concept but not a brand."

The franchisor must have the financial muscle to grow the business beyond the breakeven point, Gonzaga said.

Asked just how much responsibility franchisees had to ensure that they understood exactly what they were letting themselves in for, Koral said: "It is important for a prospective franchisee to conduct a thorough investigation of the franchisor beforehand."

This included interviewing existing franchisees - not necessarily the ones "the franchisor has told you to call" - compiling a business plan on the area and comparing the franchise opportunity against other business opportunities.

Vera Valasis, the executive director of Fasa, said that if there was a complaint against a Fasa member, the association was obliged to investigate. Fasa provided free mediation to members to resolve disputes.

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