Business Practices Committee Report 61

Franchising is a business arrangement by which the franchisor grants to the franchisee the right to sell the franchisor's products or services according to the guidelines set down by the franchisor. The franchisee uses the franchisor's name, goodwill, products and services, marketing procedures, expertise, systems and support facilities. In exchange the franchisee usually pays the franchisor an initial fee and ongoing management services fees (or royalties) as stipulated in the franchise agreement. This fee pays for the ongoing support services provided by the franchisor and allows for a profit for the franchisor.

The interdependence between the franchisee's turnover and the support provided by the franchisor is what makes franchising such an attractive proposition, because each party wants the other to succeed. The franchisee is at the sharp end of the market and is concerned with maximising returns through consumer satisfaction. The franchisor concentrates on maintaining the competitive edge of the product or service and providing the support services necessary to help the franchisee concentrate his sales efforts effectively.

More than 5 000 franchise businesses, generating more than R12,5 billion in sales annually, are distributed over the South African landscape. Sales by franchised businesses account for approximately six per cent of retail turnover and more than 92 000 people draw their salaries or wages from a franchised business.

A prerequisite for successful franchising is that the franchisor must have in place the following: an existing good name, goodwill, a successful product or service, marketing procedures, expertise, systems and support facilities. Should a "franchise" on offer lack these prerequisites it is not a true franchise.

The Committee receives many complaints from franchisees against franchisors. Often these "franchisors" do not sell franchises as set out above. Often the goodwill, products and services, marketing procedures, expertise, systems and support facilities do not even exist. Many consumers believe that when they buy any "franchise" they are on the road to success and financial freedom. Often these purchases pave the way for failure and financial hardship.

It should not be overlooked that consumers also have a part to play. They must become fully conversant with their rights and obligations as they are set out in any relevant contract and should obtain legal advice before entering into franchise contracts.