There is just over a week left before the 7 August deadline for comment on the Competition Commissionâs draft terms of reference for a franchise market inquiry (FMI) is reached. What the commission is investigating is features of the South African franchise sector that may impede, distort or restrict competition.

The commissionâs rationale for the FMI is driven by complaints that franchisors are failing to pass on supplier discounts, insisting on non-negotiable pricing, and providing misleading financial projections.

Itâs a consumer protection issue first, with whatever the assumptions are about another BEE-compliance investigation as a secondary effect.

Daily Maverick arrived at that conclusion after tapping Mia de Jager, commercial, real estate, and dispute resolution partner at Adams & Adams, for a more learned opinion.

While the commission flags high unencumbered cash requirements as a barrier to entry, De Jager believes that franchising inherently mitigates risk for small and medium enterprises (SMEs).

âWe do need to acknowledge that there are barriers to entry, but in a franchising model, itâs potentially less so than traditional non-franchising businesses,â she explained, pointing out that franchisees benefit from an established brand, training material, and vetted supplier lists which form a sustainable business model.

Not all best practices are created equal

While there was some predictable pearl-clutching when the inquiry was first announced, De Jager is largely in support of the move.

âI do believe that the core of the franchise business model will survive this inquiry ... but they will look at how some of it is implemented.â

And that position is the dominant sentiment across the major legal voices. Bowmans, for instance, says the vast scope of the inquiry, which spans multiple sectors from fast food to healthcare and agriculture, aligns with the commissionâs preliminary view that there are perceived power imbalances between franchisors and franchisees, pointing out that the commission is specifically targeting concentration through acquisitions, upfront capital contributions and restrictive agreement terms.

But a look at the terms of reference does point to the primary intent behind the FMI being aggressive economic transformation.

As De Jager pointed out, the commissionâs actions are heavily influenced by the Competition Actâs mandate to âensure that small and medium enterprises have equitable opportunity to participate in the economy and it also directly says to promote a greater spread of ownership and to increase the ownership stake of historically disadvantaged persons [HDPs]â.

When viewed like this, the FMI is not just about legal compliance; it is rather a targeted intervention to dismantle structural and financial barriers that keep HDPs and SMEs out of lucrative franchise networks.

A net gain for South Africa

But, and this is a big one, the FMI cannot be viewed in isolation from existing consumer laws.

âYou canât look at franchises without looking at the Consumer Protection Act, which of course, has its own set of protections available and also recognises this imbalance in bargaining power,â explains De Jager.

âSo I do believe that the inquiry will hopefully be an opportunity to marry the Competition Act with the protections of the Consumer Protection Act.â

The inquiry may act as a catalyst for finally accrediting a binding, franchise-specific Industry Code under Section 82 of the Consumer Protection Act to handle franchisor-franchisee disputes outside of costly courts.

This inquiry is a net positive for SMEs and HDPs. It promises to lower the traditionally prohibitive financial barriers to entry by addressing stringent funding requirements.

And, by targeting information asymmetry, prospective SME and HDP franchisees will be empowered with accurate, transparent financial projections before investing.

Ultimately, it will level the playing field, ensuring that once an SME enters a franchise agreement, they are not suffocated by unfair supply mandates or price dictations, allowing for more sustainable business growth and business incubation opportunities.

If you disagree, the clock is ticking. DM