By Hugh Melamdowitz
Despite the volatility and uncertainty of the South African economy at present, franchising remains a viable option for South African entrepreneurs who wish to generate a good income and create employment opportunities.
In fact, franchising is seen as a highly achievable area of potential growth in the South African economic sphere.
The Franchising Association of South Africa (FASA) loosely defines franchising as the granting of a right to operate a business or a license under certain specific conditions.
Entrepreneurs on both sides
The franchisee has the advantage of entering a trading system with established experience. They are able to trade under a well known and reputable brand, using a proven business model.
In turn, the franchisee must devote time, effort and their own business acumen to grow the business, leveraging the brand and business systems. In this case, the most obvious entrepreneur is the franchisee, who has the opportunity to build a profitable business and, in turn, generate jobs for others. But the franchisor is also an entrepreneur.
The franchisor, by granting licenses to other businesses, will create jobs. The franchisor needs significant infrastructure and human capital to ensure the successful operation of the franchise, proper oversight, and franchisees can access support (such as marketing and training) as needed.
South African legislation
The Consumer Protection Act 68 of 2008 (the CPA) attempts to balance the franchisor / franchisee relationship.
It requires franchisors to provide prospective franchisees with an information document containing specific information about the potential franchise business, including:
- The financial requirements that a prospective franchisee would need to meet in order to establish the franchise operation.
- The expected current operating costs.
In addition, the CPA provides that the franchise contract must contain specific information and that the franchisee, after signing the contract, is entitled to a “cooling off period” during which he can terminate the contract.
The following should be included on the front of each franchise agreement:
“The Franchisee is informed that under Article 7 (2) of the Consumer Protection Act No. 68 of 2008 (“ the CPA ”), the Franchisee may cancel a franchise agreement without charge or penalty in within 10 (ten) working days after signing such an agreement, by giving written notice to the franchisor.
PI in franchise relationships
There are three main types of intellectual property (IP) that play a role in franchise relationships: copyright, trademarks and possibly know-how.
Therefore, when a franchisor grants an IP license to a franchisee, all three must be included in the franchise agreement under the definition of “intellectual property”.
Copyright would normally subsist in the operations manual, the computer programs being part of the system, and the know-how fixation (when the know-how is removed from the head and recorded in a document), whether it is incorporated in the operations manual or in any other documentation or computer program.
The franchise agreement should make it clear to the franchisee that the copyright in the operations manual belongs to the franchisor and that any copying of it (other than specifically authorized for commercial purposes) would constitute copyright infringement. .
Know-how, which includes a company’s trade secrets, is very difficult to protect. This is because it often only exists in the head of the individual employee. In my opinion, this development of know-how must be encouraged, to promote job creation and business development.
What the individual employee should not have the right to do is remove any documentation containing know-how, confidential information or trade secrets, including customer lists and supplier lists. The restrictions may even include a ban on contacting suppliers directly.
The know-how is generally controlled by a confidentiality agreement, which must stipulate the protection of confidential information relating to:
- The finances (income and expenses) and profitability of the business.
- All confidential, technical and commercial information relating to the operation of the company (including information contained in the operations manual and commercial information, including customer demographics, cost of the product, provenance of the product, etc.)
Both registered and unregistered trademarks are protected in South Africa – the former under the Trade Marks Act 194 of 1993 and the latter under common law. The CIPC administers the Trademark Registry in South Africa. Applicants who wish to register a trademark must submit separate applications for each category of trademark goods or services in which they wish their trademark to be protected. Once registered, a trademark owner is issued with a trademark registration certificate. Trademarks are valid for a period of 10 years, during which time the trademark owner has exclusive rights to use the trademark concerned, subject to conditions that may be imposed by the CIPC.
Trademark registrations can be renewed every 10 years, for a further 10 years, and a trademark owner can protect his rights indefinitely. Trademarks are usually registered in an attachment to the franchise agreement.
It is essential for the franchisor to have a detailed knowledge of trademarks and the principles regarding the use of trademarks in a particular class, to know who authorizes the use and who obtains a license for the use. It is the brand that underlies all franchise businesses because it is the brand that the public knows and attracts customers.
Advice to future franchisees
If you are considering becoming a franchisee, it is a good idea to check and assess the intellectual property rights that are part of the license granted under the franchise agreement.
You can also, more generally:
- Contact existing franchisees, suppliers, employees and customers.
- Carefully study disclosure documents and financial statements to verify financial health and expected profitability.
- Check to see if the franchisor is a member of industry organizations with applicable codes of conduct.
- Check court judgments or bad credit records against the deductible
- Visit franchise stores to experience services / goods from a consumer’s point of view
What is the result ?
Whether you are a future franchisor or a future franchisee, franchising is a highly viable business methodology in South Africa. However, while a franchise is one of the easiest and most secure businesses to start, it is important that you fully protect existing intellectual property (franchisors) and ask the right intellectual property questions ( franchisees) – to prevent ease and safety from becoming complications and risks on the road.
Hugh Melamdowitz, Partner, Spoor & Fisher South Africa.
* The opinions expressed here are not necessarily those of the IOL or the titles sites.