What To Know When Franchising Your Business
Not every business is franchisable, says Eric Parker, partner at Franchising Plus. “It’s important to do a full feasibility study to see if a business’ processes are replicable and scalable with the potential to grow it into a franchise, rather than a network of branches,” he explains.
Poke the bear
Franchising Plus runs through an 11-point checklist with potential franchisors as part of their feasibility study, which also examines the financial aspects of the would-be franchise. Those points examine things like whether the skills are transferable, whether the gross profit is enough to warrant royalties and so on. “That’s a two-month process, with a thorough examination of and write-up on all aspects of the business to see if it would be sustainable as a franchise,” says Parker.
Franchising law expert Maria D’Amico explains that, once someone has decided to proceed with franchising their business, there are several steps, starting with drawing up documentation that complies with the Consumer Protection Act (CPA). “The first step is the Disclosure Document – this contains all the information that backs up the franchise, including details about the franchisor, the financial projections, establishment costs and the like – between 20 and 30 elements,” she says.
Protect your business with a contract
Once the Disclosure Document is drawn up, the Franchising Agreement, which also needs to be CPA-compliant, follows. This is the document that acts as a contract to legally underwrite the rights and obligations of both franchisee and franchisor, outlining intellectual property ownership, definitions, payment clauses, franchisee and franchisor obligations, disclosure, confidentiality, restraint of trade and handling termination.
“I believe that if these documents don’t comply with the CPA, franchisors run the risk of them being invalid and seeing the franchisee able to resile from the agreement,” says D’Amico.
Trademark your brand
Next is the registration of the franchise trademark with the Registrar of Trademarks. Before you do this, it’s important to do an initial investigation to see whether there are any other businesses in the same sector with similar brands. There’s a cost to this – about R3 000 – but it could save a franchisor plenty of time and money down the line when the brand is ready to be rolled out and a similar brand objects.
“Whatever the franchise brand is, a franchisor will need to register it in at least two trademark classes – the type of business and then in the franchising class,” says D’Amico. The cost of registering in these classes is also around R3 000 per class.
Lay it all out
With the brand outline and trademarks protected, the real meat of any franchise is the Operations Manual – effectively the business’ bible. “It’s the A–Z – how long before opening the staff need to arrive, what needs to be prepared before opening, the value of the cash float for the till, the branding, uniforms – literally every aspect of the franchise’s day-to-day operation,” says D’Amico. “It’s an essential part of the franchising process because every aspect of the business depends on it.”
Buyer – and – seller – beware
Prospective franchisees need to be given the Disclosure Document and Franchise Agreement at the start of the partnership process. They have 10 working days to peruse, ask questions, do their due diligence and ask for opinions. If they sign, there is another 10-working-day cooling-off period, during which they can terminate the agreement without penalties, financial or otherwise.
“I advise all franchisors to never impart any IP, confidential information, the Operations Manual or anything that relates to the ‘secret sauce’ of the business during that cooling-off period,” says D’Amico. “If a franchisee has that information and cancels the agreement within that period, they can retain and use it without penalty.”
Pay to prepare
“Assessing and preparing a business for franchising is an expensive exercise, but doing it properly can mitigate enormous costs down the road,” says Parker. The Disclosure Document can set you back around R30 000, the Franchise Agreement another R45 000–R50 000 and a comprehensive Operations Manual, about R180 000. “Franchising is an investment from both franchisor and franchisee, but that investment helps ensure that the principles are sound”.