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Stage 4 of 4 — Buying a franchise

The franchise agreement: what you are actually signing

The numbers tell you whether the unit can pay you. The agreement tells you what you are bound to regardless of whether it does. This is the stage most franchisees under-prepare for, because by the time the agreement arrives, the decision to franchise usually already feels made.

Territory rights

A territory clause defines the area in which the franchisor will not place a competing outlet of the same brand. What matters is not whether the clause exists but how it is defined and enforced. A vaguely worded territory, or one the franchisor reserves the right to adjust, offers less protection than it appears to on first read.

How it is defined
A radius, a suburb boundary, or a population catchment are all common, and they are not equivalent. Understand precisely what is protected and what is not, including whether online or delivery-based competition from the same brand falls inside or outside the clause.
Exclusivity versus priority
Some agreements guarantee no competing outlet in your territory. Others only guarantee you get right of first refusal on a new site. These sound similar and are not. Know which one you have.
What happens as the brand grows
A franchisor scaling nationally has an incentive to open more sites over time. Ask directly how territory decisions are made as the network expands, and get the answer in writing where it matters.

Restraint of trade

Every franchise agreement includes a restraint of trade: a clause preventing you from operating a competing business, typically within a defined radius and for a defined period, after the agreement ends. This applies whether you choose to leave, the franchisor chooses not to renew you, or the relationship ends in a dispute. It is one of the few terms in the agreement that outlasts the agreement itself.

South African courts will generally enforce a restraint of trade if it is reasonable in scope, duration and geography, and will strike down or narrow one that is not. Reasonable is doing a lot of work in that sentence, and it is tested case by case. The practical implication is not that these clauses are unenforceable, most are, but that you should assume the one in front of you will hold and plan accordingly, rather than hope a court will later find it excessive. The full legal detail sits in the restraint of trade guide in the knowledge base.

Renewal and exit

A franchise agreement has a fixed term, commonly five to ten years, and what happens at the end of it is one of the most consequential and most overlooked parts of the whole document. Some agreements guarantee renewal on standard terms provided you have complied with the system. Others leave renewal entirely at the franchisor's discretion, which means you could build a business for a decade on an asset you have no guaranteed right to keep operating.

Selling the franchise partway through the term is usually possible but constrained: the franchisor typically holds a right of first refusal and must approve any buyer, who then qualifies under the franchisor's own criteria. This affects what the franchise is actually worth if you need to exit early, which is a different number to what it earns you while you run it.

Before you sign

Franchise agreement checklist
  1. Have an attorney experienced in franchise law review the agreement, not a general commercial attorney.
  2. Confirm exactly how the territory is defined and what is and is not protected within it.
  3. Read the restraint of trade clause assuming it will be enforced, and understand what it prevents you from doing and for how long.
  4. Establish whether renewal at the end of the term is guaranteed on compliance, or at the franchisor's discretion.
  5. Understand the resale process: the franchisor's approval rights, and how they affect what you could realistically sell the franchise for.
  6. Confirm what obligations, if any, survive termination beyond the restraint of trade, such as outstanding fees or de-identification of the site.

Frequently asked questions

What is a restraint of trade in a franchise agreement?

A clause preventing you from operating a competing business, usually within a set radius of your former site and for a set period, after the franchise agreement ends, whether it ends by your choice, the franchisor's, or simply by not being renewed. In South Africa these clauses are generally enforceable if they are reasonable in scope and duration. Read it before you sign, not after you want to leave.

Can I sell my franchise to someone else?

Usually, but the franchisor typically holds a right of first refusal and must approve the buyer, who then has to qualify under the franchisor's own criteria and often complete their training. The agreement sets out the process. A franchise that is difficult to exit is worth less to you than one that is not, regardless of how well it trades.

What happens if the franchisor does not renew my agreement?

Depends entirely on what the agreement says, which is why the renewal clause deserves as much attention as the initial term. Some agreements guarantee renewal on standard terms if you have complied with the system. Others leave renewal at the franchisor's discretion. Building a business for years on a franchise you are not guaranteed to keep is a materially different bet.