TURNING SCREWS ON FRANCHISE DEALS
WE ARE in an era when more and more people want to start their own businesses.
WE ARE in an era when more and more people want to start their own businesses.
But a number of unsuspecting budding entrepreneurs continue to become victims to unscrupulous franchisors who use any trick in the book to rob investors.
Some of these franchisors place adverts in newspapers and on the Internet to attract prospective businesspeople in their ventures.
But many business opportunity promotions are nothing but scams that take investors' money upfront and fail to deliver on promises.
Up to now the South African franchise industry has been unregulated. All that is about to change with the introduction of the recently published Consumer Protection Act.
The bill specifically defines a franchise agreement, the key elements of which are that in return for payment the franchisee has access to the franchisor's know-how and intellectual property, while at the same time the franchisor has substantial control over key aspects of the franchisee's business.
The bill sets out requirements that will apply to franchise agreements.
Firstly, a valid franchise agreement must be in writing and signed by the franchisee.
Secondly, a franchisor will need to provide certain information as may be prescribed in separate regulations to be issued once the bill comes into effect.
The act will protect consumers like Ayanda Mtanase who has been battling to recover R68000 she paid to secure a stall at Cavendish Glen in Kempton Park.
Mtanase said she was interested in taking on a franchise deal from Multiserv.
"So I went through all the necessary formalities and procedures, but up to now I don't have the stall."
It was two years ago that she made the offer.
Mtanase said she paid a security fee of R68000 in December 2008 and heard nothing from Multiserv for a week until she made enquiries.
Two meetings were later arranged to discuss the prospects of owning a Lakeside Mall store but the contract was not concluded.
After the two meetings Mtanase was still unable to own a franchise and in early February she was told of another stall that was available at the Greenstone shopping complex in Edenvale.
She said she looked at the financial statements of the stall and was not pleased with the low turnover the store was generating and decided not to take it.
"At this point I had already lost all faith in the franchise idea. I decided that I would no longer look to take on a franchise from Multiserv and decided to cancel the deal and demanded my money back."
Only then was Mtanase told that there were penalty fees.
"My problem is that I was not informed that the charges for meetings and phone calls would be my responsibility," Mtanase said.
"The company showed an alarmingly low level of professionalism in the way the deal was handled as no paperwork was signed by me even after I had deposited such a large amount of money to them."
Multiserv is a member of the Franchise Association of South Africa.
The company offered to refund Mtanase R60000 after deducting their R8000 penalty fees but Mtanase refused. She was only willing to pay R1000 for penalty fees.
Fasa's Vera Valais said they would consider Mtanase's complaint.
l Up to now, the South African franchise industry has been an unregulated industry.
The present situation is that there is no legislation dealing specifically with franchising.
Certain general provisions in the Competition Act would be relevant to franchising, such as that a franchisor may not fix a franchisee's prices.
Chris Charter, director at law firm Cliffe Dekker Hofmeyr, was quoted in Business Day as saying the status quo of the franchising industry was that it relied on self-regulation through Fasa and its voluntary code of ethics, which is supported by best-practice guidelines that among other aspects require each franchise agreement to have a disclosure schedule and an operations and procedures manual.
"But despite these industry guidelines there is still the danger of fly-by-night franchisors that can ruin the lives and destroy the savings of franchisees. Any remedies have to be enforced in a civil court, which is expensive and time consuming," said Charter.
"For instance, franchisees of a leading video rental chain have alleged a number of unfair practices on the part of the franchisor, but have been forced to seek free legal aid or a lawyer acting on contingency in order to take action against the franchisor."
Charter said the new bill was specifically concerned with the franchise sector, as many small businesses and individuals choose this route when seeking an entrepreneurial venture, perhaps after leaving corporate life for various reasons or simply not being able to find employment.
"Franchisees are a potentially vulnerable group of consumers and it is most positive that the bill seeks to regulate transactions between franchisee and franchisor, a relationship that historically is weighted in favour of the franchisor.
"Reputable and ethical franchisors should have no problem complying with the provisions of the bill when it is enacted into law."
South African franchisors will be legally obliged to comply with the requirements once the act is implemented.
l Franchise agreements will now be challenged. Previously no one could challenge the content of an agreement, no matter how one-sided the agreement was in favour of the franchisor.
"Where once franchisees who signed an agreement were bound by it regardless, making it easy for them to be fleeced by unscrupulous operators, the new legislation prescribes cooling off and cancellation periods," Charter said.
l A franchise agreement signed by both parties remains the basis on which the legal relationship is governed but the act is intended to prescribe certain standards and non-allowed clauses in an agreement; for the first time, it also forces franchisors to disclose certain information to a franchisee before they enter into agreement with the franchisor.
The disclosure document is deemed part of the franchise agreement and any misrepresentation on the side of the franchisor would entitle a franchisee to opt out of a franchise agreement.
l Besides certain standard inclusions in franchise agreements, full disclosure of key aspects relating to the business system are the individual's most valuable means of protection.
If a franchisor had, for example, closed down any operations in the last three years, they were previously not obliged to share the details of such closures with prospective franchisees. Now they have a legal obligation to do that and to provide all existing franchisees' contact details to prospective franchisees and invite them to make contact with the network.
In addition, the disclosure document will now be seen as the most important element of protection for franchisees and all expectations are that the legislator will require every franchisor to have a disclosure document that meets the stringent requirements of the Fasa.
l What recourse do franchisees have if they find they have been duped into entering an unscrupulous business venture?
"Once the act comes into effect, any franchisor acting in an unlawful manner can be criminally charged," Charter said.
l Currently Fasa tries to mediate situations where franchisees and franchisors have problems; this is, however, a voluntary process that is applicable only to Fasa members, and only before either party has decided to take legal action.
It is worth noting that about only one third of franchisors in South Africa are Fasa members. As a result, a great number of franchisees have had absolutely no protection against franchisors with questionable business practices, nor have they been protected by any law.
The act will finally change all that. - Additional information sourced from Business Day