EI man 214: chapter 12 – franchising

Forms of business licensing

o Franchising is one form of business licensing & many different forms of agreement are
regularly described in franchises
o Licenses are in themselves an oppourtunity for an entrepreneur to start or expand a
business

Licenses
o License agreement: confers on the licensee the right to manufacture, sell or use
something which is the exclusive property of the licensor
o Normally stipulates an exclusive territory in which the license can exercise this right
o Licensee pays licensor a royalty (commission) on sales in exchange for the license
o Licensor usually has little or no control over the licensee beyond the terms of the
agreement
o Example: motor vehicle manufacturer. Nissan ins SA manufactures Nissan motor cars
under license in Southern Africa & pays a royalty to Nissan in Japan, who has no
control over south African manufacturer

Right to use a trademark

o Owner of trade mark (licensor) grants the user (licensee) the right to exploit a trade
mark commercially, in return for which certain fees are paid (royalties)
o Licensor retains ownership of the trademark & any goodwill associated with it accrues
to the owner rather than the user
o Eg: where a company in SA obtains right to use a trade mark like Samsung on its
products in SA. Normally, there would be certain conditions in respect of quality, etc.

Concessions
o Concession can take on 1 of 2 forms:
o Where licensor grants licensee the right to sell licensor’s products or services in a
given location OR
o Licensor grants right to sell a particular range of products or services in an existing
retail or business outlet

Dealerships
o In a dealership, manufacturer grants a second party, the dealer the right to sell the
manufacturer’s products within a given area
o Dealer gets exclusive rights to a specific territory & right to operate under
manufacturer’s trademark
o Dealer is required to maintain the standards & corporate image demanded by the
manufacturer
 o A dealership constitutes a sales entity which undertakes to sell a line of products for a
manufacturer or a wholesaler
o Customary form of business licensing in motor industry
o Little difference between a dealership & a distributor, except dealers sell directly to
public

Definition & characteristics of the franchise concept

Franchisor
Franchising offers someone who has developed
a certain business system, and who owns certain
Franchisee
intellectual property (trademarks, copyright & Person who obtains the rights to operate
patents) used in connection with it, the the franchisor’s business system & the
opportunity to make the system & the use of IP license to use the intellectual property
available to others in exchange for payment

o In principle, franchising is suitable for any kind of business system

o Some of most important franchises are connected with motor products & services,
cleaning services, building & home services, business services, education,
entertainment, food, health etc

Franchise operation
A contractual relationship between franchisor & franchisee in which the franchisor offers, or
is obliged to maintain a continuing interest in the business of the franchisee in such area as
know-how & training
Franchisee operates under a common trade name, format &/or procedure owned or controlled
by franchisor
Franchisee will or has made a substantial capital investment in the business from their own
o Franchise: a grant by franchisor to the franchisee entitling the latter to the use of a
complete business package containing all elements necessary to establish a previously
untrained person in franchise business, to enable them to run it on an ongoing basis,
according to guidelines supplied efficiently & profitably
o Apart from initial amount franchisees must pay when contract is concluded, also
obliged to pay royalties to franchisor for duration of franchising agreement
o Franchisor exercises constant measure of control over the business system that has been
made available to franchisee – franchisee must operate the business system under the
tradename or trademark of the franchisor
o Franchisee is also provided with operating manual that forms part of franchise
agreement & is obliged to operate strictly according to prescriptions, methods &
standards contained in the operating manual
 o Purpose of continuing control: maintain uniformity within the franchise network., so
that goodwill associated with the name may be preserved or enlarged
o Goodwill: the benefit & advantage of a good name, reputation & connection of a
business
o Goodwill can be regarded as a dependent component of enterprise in that it can
enjoy a more or less permanent existence only within the context of the enterprise
o Factors that contribute to formation of goodwill: location of business, entrepreneur’s
personality & reputation of the business
o Aim of the entrepreneur is to attract customers & keep the suppliers, creditors &
employees satisfied

Characteristics of franchising
o Intellectual property of franchisor is made available to franchisee: may include:
o Designs
o Know-how
o Copyright
o Goodwill
o Trademarks
o Trade secrets
o Patents
o Franchisor grants franchisee a license to use such IP but remains its rightful owner

Franchisor
o Firm that owns business concept
o Must have veen in existence for some time
& be operating a few stores of its own
before it can franchise
o Allows franchisor to sort out any problem
areas before other people invest in system
o Eg: Steers holding company
Franchisee
o Entrepreneur who buys a franhcise from
franchisor & who will, in most cases,
operate the business
o Ones who put their money at risk, and it is
therefore of the utmost importance that they
ensure that the franchise system they
choose belongs to a quality company

Franchise contract Royalties

o One of most important elements
o Contract specifies all terms on which
the relationship between the
franchisor and franchisee is based
o Helps both parties to know what the
terms of the relationship are &
serves as a legal document if any
disputes should arise
o Specifies all rights and obligations
of 2 parties & how franchise is to be
o Also called management service fees in SA
o Monthly fee that franchisee has to pay franchisor
for rights to operate franchise
o Can be either fixed amount or % of franchisee’s
turnover
o & calculated monthly by multiplying turnover by
&
o Franchisor’s primary income, which is sued to
finance support services of franchise system – staff
salaries, admin systems & operating costs
Marketing fee Franchise fee
o Can also be a fixed amount of % of o Lump sum payment that franchise apys to
turnover franchisor when they sign franchise contract
o Used to finance advertising campaigns of o Franchisor uses money to finance opening of
franchise company new franchisee’s business
o Allows company like spur to advertise on o Franchisor might also pay expensies of
TV/radio – something small business cant searching for a site, legal fees for franchise
do contract etc
o One of main sources of conflict between
The structure of the industry in south Africa
o May be a manufacturer
or any other channel
member who has an
attractive business
concept worthy of
duplication
o Franchisor can sell
franchise directly to
individual franchisees or
market it through master licenses or area developers
o Most franchisors also own 1 or more outlets that aren’t franchised, referred to as
company-owned or corporate stores
o In addition to these parties, the franchising industry comprises other important groups
o Groups, called facilitators, include: associations, government agencies & private
businesses
o Numerous state agencies involved in the franchise industry in SA:
o Industrial Development Corporation (IDC)
o Small Enterprise Development Agency (seda)
o Do the following:
o Provide info on franchising opportunities
o Enforce franchising laws & regulations
o Pre-sale franchise disclosure practices are subject to special scrutiny by these agencies
o 3rd category of facilitators: private. Business providing franchise information &
consulting services to franchisors & franchisees
o FASA, Franchise directions & Franchising Plus (businesses that assist with
franchising evaluation & other development services

Types of franchising
Business format franchising
The dealership o Most common type of franchise is one that offers
 Services
o Include personnel agencies, estate agencies &
personal services
o Franchises have established names, reputations &
methods of doing business
o Eg: AIDA, Pam Golding, PostNet, RE/MAX
Profile of South African Franchise Systems
o Difficult to determine a profile of franchise systems in SA since lack of official
information & statistics is death of franchising research in this country
o Over years, The South African Franchise Warehouse published different franchise
systems & listings of existing franchises on sale, available new franchising sites,
franchising finance, legal, ethical & marking issues, etc.
o Largest amount of franchises can be found in Quick Service Restaurant Sector (99) &
Property Restaurant sector (84)
o Only 5 in Security sector
o Out of 746 franchises recorded only 139 were members of FASA
A profile of SA franchising systems:
 Advantages and limitations of franchising
Advantages from franchisee’s viewpoint
A proven system Start-up assistance
o Unlike a truly independent entrepreneur, a o Franchisor take every new
franchisee need not prove the viability of the franchisee under its wing & provide
concept them with initial training
o This has already been done by the franchisor, o Assist with site selection
who will have tested the concept in its own o Fitting out & stocking up of the
stores premises
o Would extend to product/service, marketing o Help with staff selection & training
thereif & systems & procedures necessary for
Ongoing assistance Advertising and purchasing
o Franchisor will provide franchisee o Franchisor will operate an effective marketing
with ongoing assistance in all programme from which all franchisees benefit
aspects of operations o Local advertising undertaken by franchisees will
o This will be linked to quality often be developed centrally, resulting in
control & appropriate feedback increased effectiveness and substantial cost
aimed at helping the franchisee to savings
improve the all round performance o Same applies to joint purchasing schemes –
of his/her business in accordance franchisor either supplies goods to members of

Easier to obtain finance Built in customer base

o For a long time now, bankers
have been well aware that the
odds for business success are
more favourable for franchised
operations than for their
independent counterparts
o Taken into account when a loan
application is being considered
o As franchisee obtains right to use the well-known
name of franchise system, customers are already
familiar & loyal towards business concept &
products or services that franchise offers
o Franchisees have benefit of a customer base that
has been exposed to concept unlike a traditional
entrepreneur that has to introduce its business
concept to potential customers for first time

Disadvantages from franchisee’s viewpoint

Increased set-up costs
o Established franchisors will
insist that certain minimum
standards of furnishings,
fittings & equipment be
maintained
o May increase intital cost of
setting up shop
o Opinion could be held,
however, that this initial
investment aids franchisee in
On-going royalties & advertising fee
o Important franchisees understand they should see
royalties & advertising fees as part of their monthly
fixed costs
o Is a reality that many franchisees struggle to pay
monthly royalty fee when sales are decreasing &
economy is at a low
Rigid operating procedures
o Success of franchised network depends on replication
of proven formula
o For individuals who thrive on experimentation &
 Bad decisions by franchisor
o If franchisor makes mistakes, could have serious consequences for franchisees in the
network
o This is one reason why it is imperative to investigate the track record of a franchise before
deciding to operate an outlet
o Franchisee is also affected by a damaged brand name if franchisor make a mistake or many

Advantages from franchisor’s viewpoint

Rapid expansion
o With franchisees providing
the start-up capital &
assuming responsibility for
day-to-day operations,
franchisors can grow their
businesses much faster via
the franchise route than if
they set up a network of
Dedicated owner-operators
o Since franchisees invest their own money, they are
usually far more committed to the long-term success of
the business than could be expected from a salaried
branch manager
o Leads to increased customer satisfaction & accelerated
growth of individual outlets
o Results in enhanced feedback regarding market trends &
competitor activity at local level, enhancing entire

Disadvantages from franchisor’s viewpoint

High operating costs Reduced income per unit
o To set up & operate an effective head office structure o Franchisor’s income is
– a vital component in long-term success of any usually limited to a % of the
franchise – it is costly franchisee’s sales
o Especially true in the early stages when income from o Factor must be weighed
management service fees tend to be significantly against the potential for rapid
lower than cost of providing support to a small growth & increased
number of inexperienced franchisees contributions from more

Restrictions on freedom to act

o Unlike entrepreneurs who go it alone, franchisors accept money from others and promise
them a blueprint for success in return
o This places them under a moral obligation to ensure ongoing successful operation
o Moreover, given the fact that the franchisees are the owners of their businesses, the
franchisor can no longer dictate changes in business policies
o To secure the cooperation of franchisees, the franchisor will have to convince them of the
merits of every proposal
 Evaluating franchising opportunities
Questions to consider:
o What is the franchisor’s financial position?
o Is it possible to obtain trade or bank references?
o What is the background of directors?
o How long had the company been in existence before it started franchising or was it
specifically set up to franchise?
o What evidence is there that the franchise format has been sufficiently piloted in a
number of locations?
o How many franchises units are currently open? Are there any company-owned units in
operation
o What has the company’s rate of expansion been?
o Is there an ongoing demand for the product/service?
o What are the initial & ongoing fees? Are they any costs?
o What happens in the event of a dispute with the franchisor
o Is there open ongoing communication between the franchisor and franchisees?

Evaluating franchising opportunities

o After identifying suitable industries, evaluation of each franchise opportunity begins
o Prospective franchisee will now have to contact each of the organisations & make their
interest known
o Many of these franchise organisations will supply info packs to prospective franchisees
containing application forms and additional information about the organisations
o In order to be able to assess each opportunity, based on their individual strengths &
weaknesses, the following needs to be done:

Scrutinise the ‘disclosure Speak to current franchisees

document’
o Document should answer
many questions & provide
many details about the
organisation, such as its
financial status, how many
franchisees it has, when it
was started, etc.
o Prospective franchisees should be sure to speak to current
franchisees within the system & even go as far as to speak
with those who are no longer a part of the network to
enquire why not
o If prospective franchisee plans to open an outlet a long
distance from the city or base of the franchisor who are
also far away from head office
o Will give the prospective franchisee a good understanding
of how much & what type of support those franchisees are
currently receiving from the organisation & what to expect
Complying with ethical requirements
o Offer & sale of franchises are not strictly regulated in SA as is the case in most other
countries
o Many unscrupulous businesspeople & confidence tricksters have used the word
‘franchise’ in adverts in recent years to add some credibility to their business proposals
o Many unsuspecting customers (or would-be franchisees) have lost their life savings as a
result of falling for these scams
o It is therefore imperative that any prospective franchisee take note of ethical
requirements associated with franchising
o Basically the CPA, FASA’s disclosure document & membership of FASA

Consumer protection act (CPA) 68 of 2008

o Traditionally, south African franchise agreements haven’t been subject to specific
regulation
o From 31 March 2011 – CPA & its regulations substantially changed the manner in
which SA law regulates franchise agreements
o Definition of franchise agreement is broad – it covers traditional business concept of
franchise agreement, but may also cover similar agreements such as licensing and
distribution

o Information that must be included in a franchise agreement:

o Notice on top of first page of agreement must refer to 10-day cooling-off period
franchisees are entitled to & to state the relevant section of the Act
o As minimum, agreement must include:
o Name & description of goods/services that franchisee is to sell or provide
o Obligations of franchisor & of franchisee
o Territorial rights granted to franchisee described in detail
o Description of products
o Details relating to advertising fund
o Effect of termination or expiration of franchise
o Info about franchisor’s directors, members or equivalent officers must be
given
o Full particulars of financial obligations that franchisee incurs in terms of
franchise agreement or otherwise related to franchised business must be
supplied
o Any direct/indirect benefit a franchisor stands to receive from prescribed
suppliers due to supplying to its franchisees or to franchise system must be
disclosed in writing with an explanation of how it will be applied
o Any provision contained in a franchise agreement that is in conflict with regulations
is void to extent of such conflict
 o Should a clause in agreement be contrary to Act or regulations, such a clause will
not be enforceable by law
o Other sections that impact on franchise agreements include:
o Section 13: governs the right of a franchisee to select suppliers
o Section 21: prohibits supply of unsolicited goods

FASA code of ethics

o South African Franchise Association (SAFA), was established in Joburg in 1979 under
auspices of the Johannesburg Chamber of Commerce
o SADA changed name to Franchise Association of Southern Africa (FASA) during 1993
o Main objectives of FASA:
o To promote the concept of franchising & to ensure that franchising as an industry is
above reproach
o To issue guidelines according to which sound franchising schemes should operate,
to apply a Code of Ethics to the industry & to act against those who transgress it
o To represent the industry, vis-á-vis the government, the media & the general public
as the need arises

Disclosure document
o FASA’s disclosure document requirements are aimed at a full & complete disclosure by
a franchisor to a prospective franchisee
o One of most important requirements of code is that a prospective franchisee should not
be permitted to part with any money or to sign a franchise agreement, in less than 7 days
after receiving the disclosure document
o Appendix 1 to FASA Code of Ethics & business Practices lays down the minimum
amount of info a disclosure document must provide:
o Full & traceable info about franchisor company, including contact details & details
of professional affiliations
o Details of qualifications & business experience of the franchisor & its officers in the
type of business being offered as a franchise & operation of a franchise
o Details of criminal or civil action against the franchisor or its officers, either taken
during past 3 years or pending
o Full details of franchise offer & underlying business
o Full details of the obligations of the franchisor vis-á-vis the franchisee
o An explanation of most important clauses of the franchise agreement, including
restrictions placed on franchisee
o Financial projections for at least 2 years & an explanation of basis on which
projections were calculated
o Full details of all payments, initial & ongoing, that the franchisee will be expected
to make, & what they can expect to receive in return for them
o A list of existing franchisees & their contact details
 o An auditor’s certificate certifying that franchisor’s business is a going concern &
able to meet its obligations as they fall due
o A statement by franchisor to effect that to best of its knowledge & belief, the
financial situation of the franchise company has not deteriorated since the day the
auditor’s certificate was issued

Advertising practice
o Because of popularity of franchising, advertisements that include words such as
‘franchise’ attract immediate decision
o As a result, unscrupulous businesspeople & confidence tricksters sometimes insert it
into adverts to attract respondents
Franchise schemes
o A scheme where a company, firm or individual known as the ‘franchisor’, gives to a
person (franchisee), the right, often exclusive to sell specified products or other specified
services in return for an initial payment, a % of profits or any other consideration
o Adverts by franchisors seeking franchisees are not acceptable unless franchisor has
provided the info required by media in advance of publication
o Such advert should not be misled, directly or by implication, as to support available or
likely reward for investment & work required
o For franchisor or franchisor’s agent, advert must state:
o Name of senior executive
o Full title of company
o Street address of company

Selecting franchise opportunities

o The prospective franchisee should put pertinent questions to franchisor & existing
franchisees
o Their answers and comments will assist the potential franchisee in deciding which of
franchise companies is most compatible with their own personality desires, ethics &
goals
Questions to ask franchisor Questions to ask franchisees
o When did your company begin and what is its o How long have you been a franchisee
history o How do you feel about franchisor and
o How long have you been franchising their employees
o Why did you decide to franchise your business o Does your business make money
o What do you look for in a prospective franchisee o Have you made profit you expected to
& why make
o What is the franchise fee, what do I get for this o How much freedom is there in the
money system
o How and when do you require payment of the fee o How do you feel about initial support
o Do you require a deposit, is it refundable provided to you
o Do you charge any other fees o How fair and easy is it to deal with
 Understanding the relationship set out in the franchise
contract
o Contracts of various franchise networks may differ, many of them have certain terms in
common
o Franchise contracts are standard form contracts that leave little room for negotiation
o Reason for this is that successful franchise networks require internal uniformity &
maintenance of set standards
o Franchise contract used as a tool to ‘regulate’ the franchisor/franchisee relationship &
to enforce uniformity & maintenance of standards within franchise network
o Places obligations on both parties to their mutual advantage
o Must also be remembered that in most cases the franchise contract provides merely a
framework
o conclusion of other contracts will be necessary for the execution of the contract
o if, for example franchise contract provides for training of personnel & supply of
products & services, such training & supply will take place in terms of further contracts
signed after conclusion of franchise contract
o parties are obliged to conclude such contracts in terms of franchise contract which, in
part, regulates content of such contracts
o in most cases, franchise contract provides merely a framework
o conclusion of other contracts will be necessary for execution of contract
o parties are obliged to conclude such contracts in terms of franchise contract which in
part regulates content of such contracts
Role of franchisor Role of franchisee
o To select best qualified franchisees who o Franchisee should conduct franchised
understand the franchise’s concept, business strictly in accordance with
products/services & are committed to established standards that were laid out
operating the system according to the in operating manual
established standards o Franchisee &/or their employees are
o To protect the franchisor’s brand & obliged to undergo training by
reputation by enforcing system standards in franchisor in business system
all company-owned & franchised locations o Franchised business is usually
to ensure that brand is not damaged in any conducted form premises that have been
way approved by franchisor. Premises must
o To make changes in system’s be maintained in a good & clean
product/service mix when necessary to condition
meet consumer’s demand & provide o Franchisee is not allowed to advertise or
The protection of the franchisor’s intellectual property
o franchisees obtain a right or license to use IP of franchisor
o do not become owners thereof & are obliged to protect it
o franchisees may not do, cause or permit anything that may adversely affect the IP
licenses granted to them, or the franchisor’s rights to the IP
o franchisees acknowledge that franchisor owns the IP & undertake not to attack or
challenge its existence or validity
o franchisee not only obtains right to use franchisor’s trademark, but is obliged to do so
o franchisee doesn’t become owner of trade marks
o use of well-known & distinctive trademarks benefits franchisee
o maintain distinctiveness of trademark, franchisee is obliged when using trademark, to
reproduce it exactly & accurately & in accordance with specifications & directions laid
down by franchisor form time to time
o all use of trademarks will be to franchisor’s benefit
o franchise may not divulge or allow to be divulged to any person any aspect of business
system, the know-how or the trade secrets other than for purpose of franchise agreement
o In this regard, the franchisee and his or her employees may be required to sign a
confidentiality undertaking.
o The franchisee undertakes to protect and promote the goodwill associated with the
franchised business.
o All goodwill generated by the conduct of the franchised business will be to the benefit
of the franchisor.

Restraints of trade on franchisee and franchisor

o The maintenance of standards and the quest for uniformity also require that franchise
agreements contain terms that place restraints of trade on the franchisee.
o Territorial restraints may restrict the operation of the business to certain premises or
territories.
o There may also be price restraints in terms of which the franchisee is obliged to supply
the franchise products or services at a prescribed price to the public.
o The franchisor may also place restraints on the franchisee with regard to products and
sales.
o The franchisee may, for example, be obliged to buy products or other necessities
from the franchisor or another supplier designated by the franchisor.
o The franchisee may be obliged to carry on business only in certain products and
services.
o There may also be a provision in terms of which the franchisee is not allowed to
change the nature of the commodities or services supplied, or the nature of the
business system.
o Also, a so-called tying agreement may be concluded in terms of which the
franchisor will supply a particularly necessary product or service to the franchisee
on condition that a certain requirement has been met, such as that the franchisee also
buys another product from the franchisor.
o Other restraints may relate to the franchisee’s right to advertise, or to competition
(e.g. the franchisee is not allowed to have an interest in a business that competes
with the franchised business) during the term of the franchise agreement or for a
certain period of time after its termination.
o Restraints of trade are also placed on the franchisor. The purpose of these restraints is to
offer the franchisee protection against competition by the franchisor or third parties.
o If the franchisee is granted an exclusive territory, the franchisor may be obliged not
to operate, or grant any other person the right to operate, the same franchise within
that territory.
o The franchisor may also be obliged not to sell products to the franchisee’s
competitors at a price lower than that at which products are sold to the franchisee.
o It may even be obliged to provide and supply products only to the franchisee.

Payment obligations
o In addition to the financial obligations incurred when the franchise is established (such
as the buying of equipment and products, and obtaining premises), the payment
obligations of the franchisee usually include an initial lump sum to the franchisor at the
conclusion of the contract, and royalties payable periodically during the term of the
agreement.
o The lump sum payment is usually an initial payment for the rights agreed to in terms of
the agreement and for the equipment, advice, assistance and training provided by the
franchisor to enable the franchisee to establish the business.
o The royalties may be fixed amounts that are payable periodically.
o They may also be calculated as a percentage of the franchisee’s turnover or net sales
within a certain period.
o The royalties are amounts that are payable for the continuing support provided by the
franchisor and the continuing use of the rights granted in terms of the agreement.
o In addition to the royalties, the franchise agreement may also provide for additional
levies related to specific services provided by the franchisor.
o The franchisee may, for example, be obliged to pay the franchisor an amount for
marketing or advertising campaigns, which are also calculated as a percentage of the net
sales.

Termination of agreement
o Franchise agreements may provide for the termination of the contract after a time period
or on the death, insolvency or incapacity of the franchisee.
o The contract may also provide that on the death of the franchisee, the franchisor may
approve the transfer of the franchised business to any of the beneficiaries of the
deceased franchisee.
o They will be required to assume the management of the franchised business as soon as
they have bound themselves to observe the terms and conditions of the franchise
agreement.
o Before such a transfer takes place, the franchisor will be entitled to assume control and
management of the franchised business and to operate it for the benefit and account of
the franchisee’s deceased estate.
o The franchisor will also be entitled to charge the usual fee for the conduct and
management of the franchised business.
o If the franchisor does not approve the transfer of the franchised business to a
beneficiary, the franchise may be disposed of at an agreed price to another person
approved by the franchisor.
o The franchisor usually strengthens its remedies against the franchisee by including
provisions in the franchise contract in terms of which the franchisor may divert from the
contract on the grounds of certain defined forms of breach of contract.
o On termination of the agreement, the franchisee must immediately cease any further use
of the trade marks and other intellectual property that were licensed to him or her.
o The franchisee must hand over all dies, blocks, labels, advertising material and printed
matter featuring the trade marks that were obtained from, or which he or she was
authorised to use by, the franchisor.
o Franchise contracts often oblige franchisees on termination of the contract to participate
directly or indirectly in the management or control of a concern that conducts business
in the nature of the franchised business for a certain period.
o The former franchisee is also obliged not to disclose confidential information or other
trade secrets of the franchisor
Potential of franchises within the emerging entrepreneurial
sector
o Economic empowerment, upliftment & increase in employment opportunities, followed
by improvements in standard of living among previously disadvantaged communities,
must surely rank among most discussed topics at various national & regional
governmental forums
o No single role player can hope to achieve this in isolation
o Joint ventures between the government in its capacity as legislator, the Department of
Trade and Industry, the banking fraternity, FASA, service providers and franchisors is
essential.
o The definition of such a model and its successful implementation could well become the
best example of public/private partnership our country has ever experienced.
o Some of the major advantages for developing franchises within the emerging
entrepreneurial sector can be summarised as follows:
o Emerging entrepreneurs, especially in rural areas, enjoy far greater consumer loyalty
than can be found in traditional trading areas
o The process of transferring the necessary skills is a much more intense and costly
affair, the system’s standards and adherence thereto are seldom questioned. The
franchisee who boasts the smallest operational variances has been drawn from the
ranks of emerging entrepreneurs.
o The selection of management and operational staff in the operations of emerging
franchisees is a more efficient process because of the virtual absence of cultural and
communication gaps.
o The aspirations and expectations of emerging entrepreneurs are generally modest,
thus reducing pressure on the profitability of the business during the early days.
Moreover, emerging entrepreneurs tend to focus on the operation of a single outlet –
not for them the “multiple operation syndrome” that traditional franchisees
frequently develop.

Questions
1. explain the key elements of the franchising concept
o A franchise operation is a contractual relationship between the franchisor and the
franchisee.
o The franchisor offers, or is obliged to maintain, a continuing interest in the business of
the franchisee in such areas as know-how and training.
o The franchisee operates under a common trade name, format and/or procedure owned or
controlled by the franchisor.
o The franchisee has made, or will make, a substantial capital investment in the business
from his or her own resources.
2. identify 3 types of franchising
o The first type is the dealership, a form commonly found in the car industry. The
manufacturers use franchises to distribute their product lines.
o The second (and most common) type is referred to as business format franchising. This
is the type that offers a name, image and method of doing business, such as
McDonald’s, KFC, Nando’s, Spec-Savers and Supa Quick.
o The third type of franchise offers services.

3. identify the key elements of franchise contract

o The duties of the franchisor.
o The duties of the franchisee.
o The protection of the franchisor’s intellectual property.
o Restraints of trade on the franchisee and the franchisor.
o Payment obligations.
o Termination of the agreement.

4, what are some of the major advantages of developing franchises

within the emerging entrepreneurial sector
o Emerging entrepreneurs enjoy far greater consumer loyalty than can be found in
traditional trading areas.
o Although the process of transferring the necessary skills is a much more intense and
costly affair, standards and adherence thereto are seldom questioned.
o The selection of management and operational staff in the operations of emerging
franchisees is a more efficient process because of the virtual absence of cultural and
communication gaps.
o The aspirations and expectations of emerging entrepreneurs are generally modest, thus
reducing pressure on the profitability of the business during the early days.