top of page

Franchising in South Africa: What Entrepreneurs Should Know

Updated: Jan 5, 2023



Franchises remain a viable option for entrepreneurs in South Africa looking to generate a good income and create jobs despite volatility and uncertainty in the economy. Franchises are regarded in South Africa as highly feasible areas of potential growth.

The Franchising Association of South Africa (Fasa) defines franchising as the right to operate a business or license under specific conditions. According to Fasa, franchise businesses are found in 21 different business sectors in South Africa, including:

  • Agricultural, mining, manufacturing and industrial services

  • Building office and home services

  • Fast food and restaurants

  • Health, beauty and body culture

  • The retail and direct marketing services sector

Entrepreneurship on Both Sides

Franchisees have the advantage of joining a proven business system. A business model that has been proven to work allows them to trade under a well-known and reputable brand.

Developing the franchise business requires both time and effort on the part of the franchisee - leveraging the brand and business systems. Franchisees, in this case, have the opportunity to start a successful business and provide employment for others. Franchisors, however, are also entrepreneurs.

Because the franchisor licenses other businesses, jobs will be created by the franchisor. Franchisees must have access to support services (such as marketing and training) where required, and the franchisor must have an infrastructure and sufficient human capital to support the franchise operation.


Legislation

In order to balance the franchisor-franchisee relationship, the Consumer Protection Act of 2008 (the CPA) was introduced. Franchisees are required to receive a disclosure document that provides information about the franchise business, including, among other things:

  • The financial requirements a prospective franchisee would have to meet to establish the franchise operation

  • The expected ongoing running costs

Moreover, the CPA stipulates that the franchise agreement must contain specific information and that the franchisee is entitled to a 'cooling-off period' in which they can end the agreement.

The following must be included on the front of every franchise agreement:

“The Franchisee is advised that, in terms of Section 7(2) of the Consumer Protection Act No. 68 of 2008 (“the CPA”), the Franchisee may cancel a franchise agreement without cost or penalty within 10 (ten) Business Days after signing such Agreement, by giving written notice to the Franchisor.”


Intellectual Property

In franchise relationships, three types of intellectual property (IP) are involved: copyright, trademarks, and possibly know-how. A franchisor should include all three under the definition of "Intellectual Property" in a franchise agreement when licensing IP to a franchisee.


Copyright

A copyright would normally exist in the operations manual, computer programs comprising the system, and fixation of the know-how (when the knowledge is removed from the brain and recorded in a document), whether embodied in the operations manual or in any other document or computer program.

The franchise agreement should make clear to the franchisee that copyright in the operations manual belongs to the franchisor, and that any copying of it (other than that specifically permitted for business usage) would constitute an infringement of copyright.


Know-How

Trade secrets are hard to protect, since they include a business's know-how. Most of the time, a business's know-how is held by an individual employee. A business venture will be studied in detail over time, along with how the individual can conduct their own business. It is my belief that this development of knowledge should be encouraged, as it will create jobs and advance business.

Employees shouldn't be allowed to remove confidential or trade secret information, including customer or supplier lists. Employees may not even be allowed to contact suppliers directly.

An agreement governing the confidentiality of know-how typically identifies the topics that should be protected:

  • The finances (income and expenditure) and profitability of the business

  • All confidential, technical, and commercial information relating to the operation of the business (including information contained in the operations manual, and commercial information including customer demographics, cost of product, where the product is sourced from, etc.)

As far as trade secrets are concerned, the information to be protected would be confidential information relating to the business of both the franchisor and the franchisee, and the rights granted in terms of the franchise agreement.


Trademarks

The Trademarks Act 194 of 1993 and the common law protect both registered and unregistered trademarks in South Africa. South Africa's Trademarks Registry is administered by the CIPC. Trademark applicants must file separate applications for each trademark class in which they want their marks protected. After trademark registration, a registration certificate is issued to the trademark holder.

An exclusive right to use a trademark holder's mark is granted for a period of ten years, during which the CIPC can impose any conditions that might be necessary.

A trademark holder can renew his or her registration after every ten years for another ten years, and maintain ownership indefinitely. An example of a brand mark would be a name, symbol, sign, trade dress, insignia, emblem, logo, or slogan the franchisor may adopt and use for marketing purposes. A franchise agreement typically contains an attachment that records trademarks.

A franchisor needs to be knowledgeable about trademarks, how they are used in a specific class, who is licensing it, and who is receiving it. All franchise businesses rely on this trademark, since it is the trademark that the public is familiar with and that attracts customers.


Tips for Prospective Franchisees

If you are considering becoming a franchisee, it is a good idea to verify and evaluate the IP rights that form part of the licence granted in the franchise arrangement. You can also, more generally:

  • Contact existing franchisees, suppliers, employees and customers

  • Carefully study the disclosure documents and financial statements to check on financial health and forecasted profitability

  • Check whether the franchisor is a member of industry bodies with enforceable codes of conduct

  • Check for any court judgments or poor credit records against the franchise

  • Visit franchised stores with a view to experiencing the services/goods from the perspective of a consumer

The Bottom Line

In South Africa, franchising offers a number of viable economic opportunities, regardless of whether you want to become a franchisee or a franchisor. Although a franchise is one of the easiest and safest businesses to start, you need to safeguard prevailing IP (franchisors) and ask the right IP questions (franchisees) in order to avoid ease and safety becoming complications and risk down the road.


Credit to Stephen Hanlon



101 views0 comments

Comments


bottom of page