If you plan to license your business for use as a franchise, you must have a franchise agreement to operate legally and successfully. A franchise agreement is used by a franchisor to contract with its franchisees. When a franchisor offers business opportunities to people using a franchised structure, this is a legal requirement. The contract is used to set out the rights and obligations of both parties, clarifying what is required of them. DTC can assist with Franchise Agreement Development South Africa!
For an organisation that wants to franchise its business operations and sell franchises to interested franchisees, the franchise agreement sets out the terms of the franchisor’s relationship with the franchisee, including the terms of payment and royalty fees.
Before entering into the contract, get your prospective franchisee to sign a confidentiality agreement and a franchise application form. A franchise disclosure agreement is also a legal requirement.
A franchise agreement will usually contain the franchisee’s obligations relating to performance criteria, payment of fees (royalties, marketing fees, training fees, transfer fees, termination fees, utility levies), marketing, reporting, training, supply of products and services, and territory.
Types of franchise agreements include:
- Master franchise agreements;
- Product distribution franchise agreements;
- Job franchise agreements;
- Conversion franchise agreements;
- Investment franchise agreements;
- Business format franchise agreements; and
- Area development agreements.
The terms and conditions consist of:
- Grant of franchise;
- Consideration payable;
- Marketing and documentation;
- Franchisee’s obligations;
- Franchisor’s obligations;
- Termination, option and breach;
- Restraint of trade;
- Franchisor information;
- Table of costs, charges and expenses;
- Trademarks and intellectual property; and
- Table of training.
Government has recognised that franchising is a viable route to increase its development of small to medium-type businesses in South Africa and a new Franchising Act has been drafted to introduce some regulation to the franchising industry. The Franchise Association of Southern Africa (FASA) has made substantial recommendations, being ethical franchising and protecting the interest of both parties with a view to an ongoing win-win situation, coupled with the development of franchising in general.
Signing a secrecy undertaking is only fair- the franchisor is entitled to ensure that confidential information does not fall, for example, in the hands of the competition.
A franchise agreement has to deal with a host of issues including intellectual and commercial property issues, operational details, financial arrangements and the initial and ongoing rights and obligations of both parties. For good measure, it also needs to set out what is to happen once the arrangement ends, be it because its term has expired or a breach of contract has occurred.
It is customary to grant the franchisee an option to renew the arrangement for a similar term once the initial term has expired but this may be subject to certain conditions. Examples of such conditions are adherence to the network’s operating procedures, satisfactory financial conduct, achievement of performance targets, willingness to upgrade the unit to conform to the then current corporate identity.
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