The business format franchise affords the franchisee the following:

• The entire business concept
• Initiation and training in all aspects of running the business, according to the concept
• Continued assistance and guidance from the franchisor
• A contract known as the franchise agreement which sets out the relationship between the franchisor and the franchisee

The following business arrangements are not franchises:

• Agencies, distributorships and dealerships. These business forms do not follow an established business format. They can change their product ranges and they do not pay royalties
• Pyramid systems. Businesses that use this method of distributing products are often wrongly described as franchises. In a pyramid system, staff members at the upper levels receive payment according to sales achieved and payments made by those lower down the pyramid
• Employment franchisees are not employees. They do not receive salaries and their only allegiance to the franchisor is in terms of the franchise agreement
• Partnerships. A franchisee is not a partner of the franchisor. The parties operate independently and are responsible for their own gains and losses. The franchisor provides the ground rules for the management of the franchise. The franchisee owns and runs the business
• Investments. A franchisee is an investor only in the sense that he or she puts money into the project. Unlike a stock-market investor, the franchisee is not a passive party who selects the stock and then waits for it to perform according to plan. He or she actively manages and promotes the business. Its success depends on the efforts of the franchisee, and his or her relationship with the franchisor

• Low risk - You know that the business you are buying works well and has proven successful
• Technical assistance - The franchisor provides the skills and technology needed to run a successful business
• Access to finance - Banks take the approach that there is less risk involved in financing a franchisee of an established franchisor than an independent business owner
• Advertising - As part of a larger group, you will enjoy the benefits of a recognised name as well as the advantage of corporate advertising
• Bulk buying - In contrast to an independent business of a similar size, you will receive the discounts available to a business that buys in large quantities
• Research and development - In the best franchises, this is a continuing process. You can take advantage of all developments that occur
• Managerial assistance - This is part of the business format, lightening your load considerably
• Specialist assistance - Franchisors often provide the services of specialists in tax consultancy, labour law, market research and product development as part of the package
• Quality control - The franchisor’s method of working should ensure a product of consistent quality, resulting in few customer rejections
• Training - The franchisor trains you and your staff in every aspect of running the business
• Start-up assistance - The franchisor often provides or helps with shop fittings, equipment selection and many other aspects of starting a business

• Limitations on personal initiative - Highly independent people may feel that the format according to which they have to run the business is too restrictive
• Start-up costs - These are sometimes higher than in a similar independent business, especially if the franchisor demands elaborate decoration of business premises in keeping with corporate identity
• Royalties and other fees - These do not apply to an independent business
• Dependence - You may not always agree with the franchisor regarding advertising, selection of equipment or other matters. The dependence that is part of the relationship can become a burden

• What are your interests?
• Which type of business fits these interests?

Now assess what you can contribute to the business:

• What are your strengths and competencies?
• Will your background and experience benefit the franchise?
• What are your personal goals? Will buying a franchise bring you any closer to realising them, or will you find that it becomes a long-term burden?

It is pointless to negotiate with a franchisor to bring the franchise closer to what you want. The reason for the success of a franchise is that it has a successful formula. 

Choose one that suits you. Do not try to adapt one to your needs. Having considered your own interests and inclinations, you can identify fields of business that may suit you.

Ask your accountant to examine the franchisor’s financial projections to see whether they are what they seem. An attorney with specialist experience in franchising should scrutinise the franchise agreement to ensure that the clauses have no hidden aspect that may surprise you later.

Franchising consultants within the industry that you intend entering will also be sources of useful information. They can evaluate the franchise you are considering and weigh it against others in the same industry. 

An experienced franchise consultant can also show you the possible consequences of clauses in the franchise agreement and give you a clearer idea of the feasibility of the business than anyone else will.

Identify those franchises in your chosen field that satisfy your criteria and evaluate them.

Do not give up if you meet with rejection from the franchisor of your choice after the first telephone call. Follow up the call with a letter or proposal that explains what you can offer the franchise.

If your approach is successful, you should make every effort to get to know the key figures in the franchisor’s business. You will be working closely with them for years to come and you will want to feel comfortable with them.

What are your plans for the years ahead? 30 More franchises in operation within 5 years

What percentage of franchises ended the relationship voluntarily last year and why? 0

May I have a list of your franchisees, including those who closed their businesses in the last three years? See Branches Tab.

May I see audited financial statements of these franchisees? Yes - You would need to approach the franchisees individually.

How much money do I need to buy the franchise? Worst case R900 000-00 Vat Excl. (Best case R600 000-00 Vat Excl.)

Are there any other costs? No

Do you expect a deposit at any stage of the negotiations? If so, is this refundable? Yes, once the lease is ready to be signed a 50% deposit of Total Estimated Cost will be required. Only refundable once a new franchisee is recruited.

By what method do you calculate the royalties? % of Gross T/O

Will you help me to find a suitable location for the franchise? Yes, however sites are in short supply and if prospective franchisees are going to rely on us solely to secure the site, they will have to sit tight till we can find one for them.

Will you design and outfit the premises? Yes, we will purchase all necessary equipment / signage / fittings etc. We install and test as well.

What training will I receive? Minimum 10 days (ideally 14 days) on site training at our Edenglen franchise site.

Will you also train my staff? We recruit and train staff on the earmarked site property.

How much time will be spent on training? Owners/Managers 10 days and regular staff 3 days before opening.

After I sign the franchise agreement, how long will it be before I can open the doors for business? 8-10 weeks after building plans have been approved (This can take 4-8 weeks depending on municipality)

How long will it take before I make a profit? 8-12 Weeks (No, this is not a printing error!!!)

Give me an idea of the average profit margins of existing franchisees. 31% G.P and 45% G.M. (Around R35 000-00 to R45 000-00 Nett profit as an owner operator)

May I have a copy of the franchise agreement to show to my attorney? Yes this is possible as long as you have completed our confidentiality document. NB: Our agreement was put together by the legal advisor for F.A.S.A. (Eugene Honey – Bowman Gilfillan Assoc.) who serves on their committee.

A) Key franchise details:

• Legal and trading name of franchisor

• Addresses of the franchisor

• Membership status with FASA

• Details of franchise officers, shareholders and employees

• Details of group structure if applicable

B)  A background to the franchise including product details

C)  Current franchisees:

• Details of all current franchisees

• Details of terminations over past year

• Details of any current litigation

D) A profile of the ideal franchisee, stating all the most important characteristics that a franchisee is likely to possess

E)  Site details if the disclosure document relates to one specific site

F)  Franchise agreement summary:

• This section should include a summary of the key clauses in the franchise agreement

G)  Franchisor support:

• This section should state in detail the level and nature of service, support and training to be provided by the franchisor

H)  Financial information:

The franchisor must provide a full assessment of the financial obligations of the franchisee.

This should set out:

• Initial franchise fee

• Establishment costs

• Initial working capital required

I)  Certain appendices should be included, namely:

• Franchise officers’ details, including curriculums vitae and the length of time that they have been involved in the franchise business

• An auditors’ certificate certifying that the franchisor is a going concern, and is in a position to pay its debts as and when they become due

• A directors’ statement on a company letterhead in which the directors of the franchise certify the viability of the business

• A set of detailed projected financial statements that are typical of an actual first year’s trading in the particular franchise

• Is your business profitable?

• Are you doing as well as the franchisor led you to believe you would do?

• Has the franchisor given you the support that he or she promised?

• Did you receive adequate training?

• Have you had any serious disagreements with the franchisor? If so, what were they about?

• Do you know any franchisees who closed their businesses? If so, why did they take this step?

• Do you know any franchisees who went insolvent?

• How do you feel about the advertising support you received?

• Does the franchisor show an interest in your business?

• Does a representative of the franchisor visit you regularly?

• If you had the choice again, would you still buy a franchise from this business?

• How long have you been a franchisee?

• How would you describe your relationship with the franchisor?

• Do you feel that your business can compete effectively with others in the field?

• Are you satisfied with the quality of products that the franchisor supplies?

• Do you receive deliveries on time?

The franchisor may split the required payments into separate units. You should know what these are, what you will be paying for and how much the franchisor requires of you.

You must pay for the outfitting and equipping of the premises, both of which can be surprisingly expensive in a retail outlet. Costs may include:

• Stock

• Deposits on premises, electricity, other services and equipment

• Staff salaries when training starts

• Licence and registration fees

Once the business is running, there will be royalties that you have to pay to the franchisor.

You also have to pay for the launch and secure early working capital to see the business through the first difficult months. The final list of expenses can grow to a formidable length and will often amount to more than you expected. Add to this the cost of finance, if you have taken out a loan to help you set up.

In running any business, you have to cater for your personal subsistence expenses. In the early months of your franchise business, it may not be possible to draw a salary.

You must provide for your personal needs until the business can pay you a salary.

Bear in mind that South Africa does not yet have specific franchise legislation. 

Therefore, the franchise agreement will be the only document that sets out your rights and obligations, and those of the franchisor.

The franchisor will have a standard agreement that you must sign. To protect the integrity of the franchise, the contract may not be negotiable. Ask your lawyer to study the agreement before you sign it. If necessary, insist on changes that will offer you more protection. 

Nothing in the agreement should depend on a friendly relationship between yourself and the franchisor. Remember that the franchisor could sell the business, leaving you to deal with someone else.

While you must protect yourself when applying for a franchise, the franchisor will also seek protection. Because of its complexity, a franchise agreement can run to fifty or even a hundred typed pages. Do not rush through it. Study every page of the agreement.

The franchise agreement is more important than most contracts as it establishes a long-term relationship between the franchisor and each franchisee. From the franchisor’s point of view, the agreement should be fair and reasonable so that it will be acceptable to all franchisees.

You can expect the agreement to contain sections that govern the use of the franchisor’s trademark by franchisees. It is also likely to contain provisions that enable the franchisor to demand the maintenance of standards. This protects all franchisees, as they become part of a chain that provides consistently good service.

The franchisor may include a restraint-of-trade provision in the termination clauses. This is a way of preventing a former franchisee from using certain intellectual property after the agreement has ended. Such restraint of trade is usually for a fixed period. Any standard agreement is likely to cover the use of the operating manual which governs the business system according to which the franchise operates in all its outlets. 

All fees and royalties will also fall under provisions in the agreement. The agreement is usually for a certain period. If you lease premises, the period of the lease should coincide with that of the premises. After cancellation of the agreement you will not need to continue leasing the business premises. The agreement must contain details regarding the granting of exclusive territory rights. It should set out the size of your territory as well as all other aspects of the relationship between yourself and the franchisor.

This is the aspect of buying a franchise in which professional help is most necessary. Ask an expert to check the document before you sign it.

• To promote the concept of franchising

• To issue guidelines according to which franchise systems should operate

• To apply a code of ethics to the industry

• To promote franchising in the small business community

• To collect and distribute information on franchising

• To maintain a database

• To provide education on franchise-related matters

• To represent the industry in dealings with government, the media and the public

FASA holds an annual franchise exposition and publishes a range of useful handbooks on various aspects of franchising. Because South Africa does not have specific franchise legislation, FASA has devised a code of ethics for the governing of franchise practices. Some of the provisions of its 18-point Code of Ethics and Business Practices are of a general nature, concerning the maintenance of high standards in business. Most of the provisions apply specifically to the protection of people involved in franchising.

While the code is useful, it is only a guide. Because it does not have the force of law, it applies exclusively to members of FASA. If you believe that a FASA member is transgressing the code, you can take it up with the member’s organisation. However, even member companies can ignore the code without suffering legal consequences.

A franchisor’s membership of FASA provides you with the assurance that the franchisor agrees to function according to the code of ethics.

You know that you will not be buying into a pyramid selling organisation, because such an organisation may not become a FASA member. As a franchisee, you can also expect full disclosure, training and factual advertising from FASA members.

However, not all reputable franchisors are members of FASA. Some who apply the highest ethical standards choose not to join the association. Ultimately, as a prospective franchisee, you are personally responsible for your decision and cannot afford to take anything for granted. You must approach any franchise deal with caution, regardless of the franchisor’s affiliation.

Membership of FASA should benefit a franchisor by enhancing his or her reputation.

The fact that members commit themselves to a written code of ethics, against which others can measure their performance, serves to reassure potential franchisees.

While you are making these preparations, your training and that of your staff should commence. Apart from the appropriate courses, the franchisor must provide a training manual to help you run the business. The franchisor should also supply operating and marketing manuals at this stage, to guide you in future.

On opening day , the franchisor usually helps with a launch to get the business going. 

• Your circumstances may change after you get into the business. Make sure that you have a way out if you need it

• You may be committing everything you have, so get professional help to evaluate and minimise the risks before signing up

• If you are not careful, you can find yourself buying something quite different from what you intended. A decision to buy a small franchise to supplement your income can turn into something much bigger in the hands of a skilled marketer

Do not take on something you do not want.

• A pile of paper will descend on you once you sign up. Unless you read it all very carefully, you may find yourself committed to something that you would not otherwise have accepted

• Be cautious of new franchises. They may offer fresh opportunities, but they are more risky than established franchises. Risk is precisely what franchisees aim to avoid

• Be wary of excessive claims by the franchisor. Some franchises have a bad reputation because of inflated claims

• Watch out for hidden costs. When you investigate a franchise, ensure that you get the complete list of financial commitments in writing

• Avoid buying a failing franchise. You can do this by asking other franchisees how they perceive the franchise. If the franchisor is hesitant about putting you in contact with them, you should probably take your business elsewhere

• Resistance to disclosing information about the business is a warning sign. You will rely heavily on the franchisor in future, so do not allow him or her to hide the financial situation. Reject arguments that the franchise is not a public company and therefore does not have to reveal financial information to you. You are not an ordinary member of the public. The franchisor owes you full disclosure

• Watch out for claims that you can make large amounts of money by spending a few hours on the telephone. Any success is going to take hard work

• Beware of the hustler who tells you that the territories are nearly all occupied, so if you do not act soon you are going to lose the opportunity. Obtain a complete list of existing territories from your franchisor

• The sales representative who attempts to impress you with his or her own material success is probably selling something of little or no value

• Be careful of the business that is too anxious to get money from you at an early stage of negotiations. If the franchisor wants cash only, do not proceed with the deal