Franchising
Introduction
What is a franchise?
Generally, the term “franchising” is used to describe the licensing of a business system which invariably includes the licensing of various types of intellectual property. Starting a franchise is undeniably exciting. If you are the owner of a successful business which can be duplicated, there are many good reasons to consider a franchise scheme.
On a practical level, there are distinct factors which could indicate whether a business has the potential to franchise. These include a strong brand, a good reputation, services which can be taught, products which can be reproduced with a certain “recipe”, and also the demand and market for more of the same products or services in additional geographical areas. A franchise, in principle, is an independent business like any other business which must comply with a number of statutes applicable to its legal persona and specific industry.

The most important forms of intellectual property which are licenced in a franchise, relates to the know-how of the manner in which a business is conducted and the trade marks which are used in association with the franchisor business. The purpose of a trade mark is to identify a business or products. It is the trade marks which assist the public to associate Franchisees with the Franchisor business. It is not possible to have a successful franchise without licensing the use of trade marks.
Consumer Protection
The Consumer Protection Act 68 of 2008 (hereafter referred to as the “CPA”) came into force on 1 April 2011.The CPA applies to every transaction in South Africa concerning the supply of goods or services where the consumer is a natural person or a juristic person with an annual turnover or asset value under the threshold of R3 million.

The CPA also applies to franchises and includes specific references to franchises and franchise agreements. On 1 April 2011, new Regulations were published in the Government Gazette in terms of the CPA which relate to franchises. The Regulations include prescriptions on the contents of Franchise Agreements, Disclosure Documents and Operational Manuals. The deadline in which to comply with these Franchise Regulations is 30 September 2011.
Buying or selling a franchise?
Before offering or selling a franchise, it is recommended that a quick due diligence be conducted on the intellectual property to be licenced. The franchise fee is usually calculated based on the value of the intellectual property (including reputation) associated with a Franchisor business. It is therefore sensible to instruct an independent attorney to review the franchise agreement and at least the trade mark portfolio of the Franchisor.

In the event that a Franchisor has not applied or acquired registration of its pertinent trade marks as yet, and the franchise has not been trading for a number for years without any conflicts, there may be risks that the trade marks associated with the franchise may be vulnerable to conflicts by third parties.

Franchise agreements should generally comply with general contract law principles and some relevant statutes, such as the new Consumer Protection Act and others. Franchisees should generally be allowed a reasonable time to review the franchise agreement and consult with an independent attorney to ensure all aspects in the agreement are clear, reasonable and legal.
Are the trade marks protected?
It is the duty of the Franchisor to register and protect the trade marks subject to the licence granted in terms of the franchise agreement. Generally, a Franchisor should attempt to protect its trade marks as broadly as possible. By doing this, a Franchisor strengthen its rights in a trade mark which will place it in a better position to avoid and/or successfully prevent third parties from passing off or copying its trade marks in any manner.

Trade marks are also regarded as corporate assets of a business and a widely registered trade mark portfolio should assist in justifying a possible higher franchise fee. A solid and strong trade mark portfolio should add value to the business and lower possible risks of the Franchisor. It is recommended that a Franchisor guarantee its ownership in the trade marks, or provide details of such registrations for certainty in the franchise agreement.

Trade marks are registered on the Trade Marks Register. There is no cross-referencing between the Trade Marks Register, Close Corporation or Companies Registers and any Domain Name Registers. It is recommended that Franchisor businesses register their business name and pertinent trade marks on all these separate registers to avoid possible conflicts and properly secure its rights.

The Franchisees should further be restricted and discouraged from registering the Franchisor’s business name or any of its trade marks, as whole or as parts, of its close corporation or company registration, or possible separate website addresses. Most franchise agreements include restraints of trade. The express restrictions on the unauthorised use or registration of the franchise intellectual property by Franchisees are recommended.

Marks which are eligible for trade mark protection include business names, domain names, slogans and logos which are distinctive. Some Franchisors consider it sufficient to register their main business name as a trade mark. However, slogans, logos, icons, signatures, combination of colours, and banners could also qualify as trade marks, if they are sufficiently distinctive.

It is recommended that Franchisor businesses should instruct attorneys to conduct trade mark audits from time to time to ensure that all trade marks used in trade are adequately protected. You are welcome to consider instructing our firm to assist with any matters relating to the following aspects relevant to franchising:
Drafting of new Franchise Agreements to comply with CPA Regulations
Update of existing Franchise Agreements to comply with CPA Regulations
Review of Franchise Agreements on behalf of Franchisees
Conducting IP due diligences
Conducting trade mark audits
Registration of trade marks, patents and designs
Registration of Companies

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JACO GROBLER
JANA DOUSSY
Liani van Tonder
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