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, which will come into effect towards the end of 2010. This will finally bring the South African franchise sector in line with countries like the US, where the industry is strictly legislated.
“South African franchisors will be legally obliged to comply with the requirements once the Act is implemented,” says Kobus Oosthuizen, master franchisor of Franchise Finance, a franchisee loan origination agency. “By that time the legislator will have included certain regulations as part of the Act. These will consist of specific requirements which will be applicable to franchisors.”
Although the Act does not refer specifically to “business opportunities”, companies will not be allowed to get away with labelling a business system or franchise as a “business opportunity” to avoid compliance with the legislation.
“The nature of an arrangement may be deemed a franchise agreement without it being described as such by the franchisor,” Oosthuizen says. “The Act as published mainly regulates certain elements typically contained in a franchise agreement. 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.
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 standard 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 will entitle a franchisee to opt out of a franchise agreement,” says Oosthuizen.
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,” Oosthuizen points out. “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 Franchise Association of South Africa (FASA).
Dealing with Shady Operators
What recourse do franchisees have if they find they have been duped by an unscrupulous business? “Once the Act comes into effect, any franchisor acting in an unlawful manner can be criminally charged,” Oosthuizen says. “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’s 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.