What is a franchise?
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.
Not all businesses can be franchised. Generally, the core business of most franchises relate to the offering for sale which implies the sale of a specific product or goods. The quality and nature of the products must be such that it can be duplicated on the same standard in order to enjoy the same reputation. Any related services offered by a franchise should also be offered and conducted on the same levels based on training provided by a franchisor.
Businesses offering professional services, such as medical, psychological, veterinarian or legal services are generally not common examples of franchising, because such services require academic qualifications acquired from tertiary institutions. The best examples of franchise businesses require entrepreneurs with the determination to learn new business skills and practices.
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.
On a commercial level, franchising is generally an attractive option and it is also an opportunity for a business owner / franchisor to start earning passive income in the form of franchise royalties, provided that these franchises are successful.
On 1 April 2011 new Regulations were published in terms of the Consumer Protection Act which relate specifically to franchises. All franchises must comply with these regulations by 30 September 2011 to avoid complaints and possible penalties.
A Franchisee is an independent business which pays to be authorised to copy a successful Franchisor business and trade under the same name.
The nature of the legal relationship between Franchisor and Franchisee basically comes down to the licensing of the intellectual property of a franchisor business to Franchisees. There are of course also commercial and practical aspects which contribute to the legal relationship between the Franchisor and Franchisees. In this regard, there are commercial rights and obligations which must be agreed on. These commercial aspects include what franchise fee and royalties will apply, whether there will be a renewal procedure, as well as increases and a possible marketing contribution. However, a franchise cannot exist without an intellectual property licence component.
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.
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.
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.
Industries with only a few competitors usually rely heavily on colour marks and combination marks to help the public distinguish their products and services. For example, most members of the public will be able to know which separate banks are referred to merely by referring to the separate colours green, blue and red , or which telecommunication service providers are referred to by the separate colours yellow or blue. Depending on the marketing strategy of a business, colours could be strong visual identifiers which can become valuable trade marks.
To help the Franchisor determine whether it is necessary to register a mark as a trade mark, two questions may assist, namely, whether the mark is an essential or distinctive feature of the get-up of the business, and whether it will be hurtful for the business if a competitor were to adopt and use the same or similar feature. 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.
Before 1996 when the new Trade Marks Act came into force, it was compulsory to register trade mark licences at the Trade Marks Office on the Trade Marks Register. Although there may be certain benefits for Franchisees to still insist on this possible action, the formal recordal of trade mark licences is currently optional.
An important aspect of the franchise legal relationship relates to an intellectual property licence. Before an intellectual property licence can be granted the Franchisor must take steps to obtain and guarantee exclusive and strong rights in its intellectual property, in particular its trade marks.
Apart from other financial and/or business advice, it is recommended that prospective Franchisees obtain independent legal advice before signing franchise agreements and conduct due diligences on the business model licenced, in particular the status of the trade marks of the franchise.
In short, it can be said that for franchisors, it is important to know what you own and intend to licence. For Franchisees, it is important to know what you sign and what you are paying for. If the legal aspects are all sorted, chances are better for a successful business relationship between Franchisor and Franchisee.
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