Thus, in a nutshell, a franchise is a safe way of being in business for yourself, but not by yourself.

What to consider

When considering which franchise to go for, you should consider the level of demand for the franchised products or services as well as the level of competition that this potential franchise could face. Some franchises have very strict controls, which would assist inexperienced entrepreneurs in avoiding some of the possible pitfalls of a new business. Other things a potential franchisee should consider is the strength of the franchise brand (and related intellectual property), the training and support provided by the franchisor systems (with or without computer hard and/or software) provided by the franchisor, the franchisor’s experience in managing a franchise system and the opportunity for growth offered by a specific franchise.

Without a doubt, the biggest consideration for a franchisee is the cost of acquiring all the rights associated with the franchise. Included in these costs could be your initial franchise fee, which can be seen as compensation for the privilege of using the franchise brand. The franchisee will then also have to make continuing royalty payments (based on income) for the use of the name and business plan of the franchise. In some instances advertising fees may also be payable into an advertising fund as a contribution towards the advertising costs of the whole franchise operation.

As an alternative to being obliged to part with a portion of hard earned gross revenue, some franchisors are prepared to accept a once off payment in exchange for the franchise rights over an agreed period. This is often called a license agreement although the principles are similar. The advantage to the franchisee is that the costs are capped but the obvious disadvantage is that you pay notwithstanding that your business may not be a success.

One should also not overlook other important considerations, like controls and termination or renewal rights. For example, particular controls that should be considered are pre-approval for locations; design or appearance standards (to ensure that customers receive the same quality of goods and services in each outlet) – it has happened that a franchisor has a change of style or in any event requires the franchisee to refurbish in accordance with the agreement at the franchisee’s expense (which could be material); restrictions placed on goods and services offered for sale by the franchisee; the franchisor may also restrict the manner in which you have to operate your franchise; franchisors may limit your business to a specific geographic area; some franchise agreements require the franchisee to purchase from the franchisor or its nominees (on their terms which may be onerous); some franchise agreements prescribe the terms on which the franchisee is obliged to sell including as to fixed retail prices (in the 7 eleven case this has been unsuccessfully challenged by the franchisees); et cetera.

Termination and renewal considerations include the grounds upon which the franchisor can terminate the franchise agreement. This is a very important consideration because, in certain circumstances, should the agreement be terminated you could lose your investment. Franchise agreements also typically run for 15 to 20 years. You will need to know whether the contract is renewable.

Franchise agreement is a normal contract

Unlike the American and many European systems, South Africa does not have an established regulatory franchising body. Franchising agreements are governed by normal South African contract laws.

A franchise is regulated by the agreement which you enter into with the franchisor and the agreement will be subject to certain terms and conditions, just like a normal contract. If you fail to keep within the confines of the agreement you could be faced with your agreement being terminated and you losing your investment.

In light of this and the fact that the legal situation pertaining to franchises in South Africa was formalised by the courts (there is thus no act which specifically pertains to franchise agreements), it might be wise to consult an attorney with experience in this area before concluding such an agreement.

In conclusion, a franchise might give you the advantage of not having to reinvent the wheel when it comes to handling the various aspects of your business from marketing to human resource management, from accounting to distribution. A proven system will enable you to avoid the traps or mistakes a new business makes, allowing you to focus all your energies on growing your business, rather than setting up your business.

Let’s start at the beginning:

Entities:

Your business needs an entity from which to trade. You can trade as your own persona under a specific name (a sole proprietorship) or through a legal entity specifically designed for this purpose (a close corporation or a limited liability company). There are pros and cons to each of these options in respect of both legal and tax issues. Most importantly, these entities can serve to protect your assets from the liabilities of your business. Your legal and tax advisors would be able to give you comprehensive advice in this regard as no one solution fits every situation.

If you have a suspicion that you are currently trading from an unsuitable entity, don’t despair – there are procedures through which your business can be transferred from one entity to another with a minimal amount of risk. However, the procedures involved tend to be quite technical and consulting with a lawyer, despite the potential expense involved, could save you a lot of financial heartache in the long run.

Starting your business:

All new business owners need to be aware of certain basic requirements before they can open their doors and watch the cash roll in. Firstly, you need to make sure that the premises from which you intend to operate your business complies with the zoning requirements of your local municipality. This can be easily be established by contacting the municipality that has jurisdiction over the area in which the premises is situated.

In terms of the Businesses Act your business might also require a so-called business license from your municipality, especially if your business makes or sells perishable food or is involved in the health or entertainment industry (ie, saunas, massage or billiards parlours, night clubs, etc).

This license can be obtained from your local municipality and is a relatively quick and inexpensive procedure. The municipality will do certain investigations to make sure that your premises comply with national and municipal building, health, safety and fire regulations and after payment of the prescribed amount you will be issued with a certificate or license which remains valid for a specific period.

Before launch day

Make sure you have all your bases covered before opening your doors to the hordes of prospective clients or customers – you certainly don’t want to run around on your opening day looking for your VAT number.

This simple, though not exhaustive, checklist will ensure that you are competent and confident on race day:

1. Make sure you have your certificate to commence (from CIPRO) business at hand
2. Make sure that you deal appropriately with pre-incorporation contracts (your legal eagle should advise you in this regard)
3. Register with SARS for income tax and VAT
4. Register with SARS for the skills development levy
5. Register with SARS for PAYE
6. Register employees for UIF and Workmen’s Compensation
7. Check the Occupational Health and Safety obligations relevant to your industry (eg. providing safety equipment to employees, putting up hazard signs etc.)
8. Check your compliance with national and municipal health, building, safety and fire regulations (ie, disabled facilities, fire escapes, etc)
9. Register with the bargaining council in your industry if applicable and understand all collective agreements which may affect your business
10. Sign employment contracts with employees
11. Register for services (electricity, telephone, water, rates, refuse removal, internet, security, public liability & general insurance, etc)
12. Apply for your business license
13. Display your certifications and licenses if necessary (halaal, liquor license)
14. Comply with packaging standards and regulations (ie, sell-by dates, ingredients, etc)
15. Open a bank account, get a cheque book and possibly a credit card machine
16. Ensure your invoices reflect all the necessary legal information and each one is unique
17. Ensure all your business documents and signage reflect all the necessary legal information (address, members/directors, registration numbers, vat no, etc)
18. Ensure all your intellectual property is properly protected
19. Display a copy of the Basic Conditions of Employment Act in your business
20. Start a minutes of meetings book (for directors / members meetings)
21. Ensure you have all the required company policies in place (ie, sexual harassment policy, IT policy, etc)
22. Register with the SA Numbering Association to obtain unique barcodes for your products
23. Ensure you comply with minimum wage legislation
24. Ensure you have a liquor license if necessary
25. Be aware of possible import/export licenses/taxes pertaining to your business
26. Comply with local signage regulations
27. As a landlord, make sure your lease is stamped within 30 days
28. Make sure you have sufficient storage space to keep all your accounting records for the required 5 years
29. Make sure your credit agreements comply with the National Credit Act
30. Enlist the help of a tax practitioner to help you comply with your tax obligations

Many businesses fail within the first three years of opening up shop. Give your business a fighting chance by ensuring that you comply with the myriad of legal obligations imposed on your business – otherwise you might find that your business faces unexpected closures, obstacles and hindrances, worries you certainly don’t need during the first hectic month.

Floss twice a day and remember cash flow is everything!

At the end of 2004 the Supreme Court of Appeal delivered a judgment in regard to surety clauses incorporated into credit applications. This case has recently lead to a number of cases in which persons who signed surety for a company’s debt in their personal capacity now attempt to side-step the surety.In the case before the Appeals court a businessman signed a credit application form on behalf of a company and in the process bound himself in his personal capacity as surety for the company’s debts. In the specific incident the businessman signed directly under a clause wherein it was stated in capital letters that the businessman bound himself as surety and co-principal debtor (see extract annexed hereto).

The specific document the businessman signed was headed “CREDIT APPLICATION FORM” – this the court found to be misleading and one of the grounds on which the businessman could not held responsible as surety.

Furthermore the businessman was only required to sign the form once where it was indicated that the businessman was signing on behalf of the company and not also a second time in his personal capacity as surety. Although a single signature would have had legal effect the court found that this increased the chances of the businessman to be misled when signing the form.

The court also took the words “I, the undersigned ………. in my capacity as ……… of the debtor” at the start of the declaration to add to the possibility that the businessman was under the wrong impression that he did bind himself in his personal capacity.

In the last instance the court found that, even though the clause whereby the businessman bound himself as surety was in capital letters, the specific clause was preceded by two other clauses which were also printed in capital letters and that this diminished the emphasis on the surety-clause. The surety-clause also forms part of a block of three clauses and the court found that this further detracts from the emphasis on the surety-clause.

On basis of the above the court found that, even though the businessman had had ample time to examine the document and failed to do so, the said businessman could not be held liable in terms of the said surety.

It would therefore be wise of businesses to adapt their current credit application forms, especially if the credit application form and surety is normally presented in a single document, so as to take this finding of the Supreme Court of Appeal into account.

POINTERS FOR UPDATING CREDIT APPLICATION FORMS:

1) Consider having separate forms for Credit Applications and for Personal Sureties.

2) Clearly mark the document not only as “CREDIT APPLICATION FORM” but as a “CREDIT APPLICATION FORM AND PERSONAL SURETY”

3) Have the signatory sign the document twice with clear indication that he/she is signing in two separate capacities – one as duly authorized representative of the company and one as surety in his personal capacity.

4) Clearly mark one of the signatures “SIGNED AS SURETY”

5) Draw attention to the surety-clause by putting it in bold, highlighting it and isolating the clause from the other clauses.

6) If the form encompasses terms and conditions on the reverse of the form, ensure that these terms are pointed out and explained to the signatory. It might even be prudent to have a third-party witness and confirm that the terms (and in specific the surety-clause) had been pointed out to the signatory.