Concern over unethical operators

The Franchise Association of South Africa (FASA) is concerned about a recent media report (Business Times 4th December 2016 titledGilt wears thin for Gold Brands franchise holders”) where it is reported that franchise company Chesa Nyama, which is part of the listed group Gold Brands Group, allegedly failed to provide certain franchisees with Disclosure Document – a legal requirement of the Consumer Protection Act (“CPA”).franchise question

What’s in the Disclosure Document?

The purpose of a Disclosure Document as required in Regulation 3 of the CPA is to provide a prospective franchisee with sufficient information to place them in a position to properly decide whether to enter into the relevant Franchise Agreement or not. Information to be provided includes the initial fee, the funds required to establish the franchise business, the initial working capital, the total investment required and the like. In addition written projections in respect of income, expense and profits must also be included, as well as information on the viability of the franchisor itself. The Disclosure Document should be given to a prospective franchisee at least 14 days prior to signing the Franchise Agreement and there is also a 10-day cooling off period after the signature of the Franchise Agreement, so as to protect the interests of the franchisee.

According to Vera Valasis, Executive Director of FASA, “Hundreds of franchisors have complied with FASA’s best practices membership requirements and have committed to ethical franchising. Incidents of non-compliance by franchisors must be rooted out as they bring the entire industry into disrepute –at the expense of many competent and successful franchisors that have invested in their brands, in their business models, in their franchisees and have ensured that their documents comply with the requirements of the CPA.”

Since its establishment in 1979 FASA has been dedicated to the development and promotion of ethical franchising, as well as guiding and safe-guarding the reputation of this valuable sector. “Without statutory powers, FASA could only regulate and enforce its own Code of Ethics and business practices on its members, who voluntarily commit themselves to operating competent and ethical business.  The requirements of becoming a member of FASA has always been a serious commitment which has no doubt scared off less scrupulous operators and particularly those who do not have the correct structures, documentation and support systems in place, which are required of a competent franchise system.”

FASA calls for Industry Code

During the formulating phase of the Consumer Protection Act, FASA made representations on several occasions which lead to substantial amendments to the draft CPA and also provided substantial input as to what should be included in a Franchise Disclosure Document. As mentioned above, Regulation 3 of the CPA sets out what should be included in the Disclosure Document including all relevant financial information.

Continuing with its quest to develop best practices and ethical franchising, FASA has developed an Industry Code for the franchise industry. It has worked closely with the National Consumer Commission during the past few years and the latest version of the Code is now being considered by the National Consumer Commission. Once it has been finalised it will be submitted to the Minister for approval.

The proposed Franchise Industry Code, in its current form establishes an Ombud which will focus on assisting with the speedy resolution of disputes. “The Ombud will have powers to robustly mediate on disputes between Franchisors and Franchisees, uphold the requirements of the CPA and assist with the efficient resolution of franchising disputes” says Eugene Honey of Adams & Adams, FASA’s Legal Advisor.

The Code is intended to not interfere with agreed to arbitration or court process between the parties. It will however provide a forum where either party may, as a first step, in line with best alternative dispute resolution processes, lodge a complaint with the Ombud, where it could be resolved fairly efficiently, should the parties so wish, thereby hopefully avoiding costly and protracted litigation proceedings. The processes can run concurrently.

Franchisor responsibility

“It is the responsibility of the franchisor to supply a franchisee with full up-front disclosure in the Disclosure Document  and then fulfil its obligations to provide extensive training on how to operate the business and also to ensure that there is ongoing support and guidance to help the franchisee make a success of his/her business. The franchisees should, before they sign the Franchise Agreement do their own viability investigation regarding the franchise business, the location and also in relation to the franchisor. They should also speak to existing franchisees and make sure that they fully understand the terms of their Agreement and what they are committing to” advises Vera Valasis.

It is estimated that there are over 750 business systems in South Africa. A large number, like the Gold Brand franchise, are not members of FASA.  “FASA would like to see all franchisors become members of the association and commit themselves to ethical franchising, in line with not only with the provisions of the CPA but more  importantly, with international best practices in franchising” says Naas Du Preez, Chairman of FASA.

“South Africa’s franchise industry goes back to the 1960’s and has developed into a strong business sector that contributes 11.6% to South Africa’s GDP and holds its own on the international franchise stage as an active member of the World Franchise Counsel.”