In recent years one of the key features of the South African business landscape has been the inbound investment of major retail players. Many of the international retailers entering the South African market present new competitive challenges to the well-established brands that have long dominated.

The investments may take the form of investor-owned businesses, but often occur through franchising and similar distribution formats. Franchising generally provides an opportunity to combine local expertise with international branding and best business practice models. The increased popularity of this format can also be ascribed to the fact that some degree of business risk and expansion cost is shifted to the franchisee. The franchise model is also efficient to expedite growth of the franchisor's business and facilitate broader access to various economies. Further, franchising has the potential to stimulate the growth of the small to medium-sized enterprise sector of the economy, increasing employment and ensuring sustainable economic growth.

There has also been an increase in the inbound investment of many international retail brands in other parts of Africa. It seems that more often than not, South Africa is identified as a good base for pan-African franchise operations because it provides a receptive market and is an efficient jurisdiction within which to establish a holding company or master franchisor.

One of the challenges of a pan-African franchise structure is that each country has its own legal framework and franchise-related requirements. Different rules apply to aspects such as: pre-sale disclosure;

  • government approvals;
  • franchisor registration;
  • trademark and IP licensing and filing;
  • currency restrictions and fund repatriation;
  • antitrust, competition and trade practice laws;
  • arbitration and dispute resolution;
  • currency issues; and
  • withholding taxes.

Although the trend is positive, more could be done to create a franchise investment-friendly environment in South Africa. Under the Consumer Protection Act 2008 the net is cast widely over franchise agreements. Certain provisions of the act are regarded as pro-franchisee and inimical to the interests of franchisors. One example is Section 48, which outlaws provisions which are, among other things, regarded as excessively one-sided or inequitable. It seems that franchisors resist these provisions, not because they promote fairness and full disclosure, but because they are vague and difficult to interpret and detract from the certainty and enforceability of those contract provisions which are intended to afford the franchisor the controls, checks and balances that it requires to maintain quality and continuity.

Unfortunately, perhaps, the franchise-related provisions of the Consumer Protection Act apply to all franchise agreements, whatever the scope, and there is no exemption or exclusion for larger, more sophisticated franchise and master franchise agreements.

It is hoped that court decisions and reliable commentary on these provisions will provide more clarity. On a more positive note, inbound investors appear to be receptive to favourable company law and tax reforms. This form of inbound investment is expected to continue to grow and develop. In addition to a thorough consideration of the business and operational aspects, an in-depth knowledge and understanding of the applicable legal requirements is key to the establishment and conduct of viable pan-African franchised businesses.

For further information on this topic please contact Lawrence Helman at ENSafrica by telephone (+27 21 410 2500), fax (+27 21 410 2555) or email (lhelman@ensafrica.com). The ENSafrica website can be accessed at www.ENSafrica.com.