Buying a Franchise in South Africa: Royalty Fee Checks

A royalty percentage tells you very little until you know what it applies to. Two franchise brands quoting the same rate can leave you with different monthly bills. Before joining South Africa’s franchise community, examine the royalty calculation as closely as the headline rate. Your aim is to establish what you will owe, when payment falls due and whether the charge remains affordable when trading is difficult.

1. Find the contractual definition of turnover

Royalties are often calculated against sales rather than profit. That distinction matters: a royalty may still be payable when your outlet makes a loss. Start by locating the definition of ‘turnover’, ‘gross sales’ or whichever term the agreement uses as the charging base.

Do not assume that this figure matches the sales total in your accounting software. Ask the franchisor to explain how the calculation treats:

• VAT: Is the royalty calculated on sales inclusive or exclusive of VAT? Separately, is VAT added to the royalty invoice?
• Discounts: Does the calculation use the advertised selling price or the amount actually charged?
• Refunds and cancellations: Can these be deducted, and in which reporting period?
• Delivery platforms: Is the fee based on the customer’s payment before platform commission, or the amount your outlet receives?
• Gift vouchers: Is revenue counted when a voucher is sold or when it is redeemed, and how is double counting prevented?
• Credit sales: Does the royalty become payable before the customer pays, and is there relief for bad debts?

Request a worked example covering transactions your outlet is likely to process. Have your accountant reconcile it to a sample sales report and royalty invoice. A verbal assurance that the system ‘handles everything’ is not a substitute for a clear contractual definition.

2. Check the effective cost in a quiet month

The quoted percentage may not be the whole charge. Look for a minimum monthly royalty, a fixed management fee or a stepped rate that changes at specified sales thresholds.

Ask whether a minimum charge replaces the percentage calculation when sales are low, or is payable in addition to it. If the brand offers an introductory concession, establish its end date and any conditions that could cause it to lapse early.

Build a simple monthly worksheet with your accountant showing:

• Sales on the contract’s defined basis.
• The percentage royalty calculation.
• Any applicable minimum, fixed charge or tier adjustment.
• VAT treatment and the resulting cash payment.
• The payment date relative to customer receipts.

Run the worksheet for an ordinary month, a weak month and a temporary closure. These are planning scenarios, not sales forecasts. Check what the agreement says about charges during interruptions: do not assume that a closed outlet automatically stops owing royalties.

Finally, identify separate technology, administration or reporting fees. Keep these distinct from the royalty, but include them when judging whether the overall recurring commitment is affordable.

3. Test reporting, collection and correction procedures

A clear calculation can still create cash-flow problems if the collection arrangements are unclear. Establish who prepares the royalty statement, which sales system supplies the data and when you must submit or approve figures.

Where the franchisor collects by debit order, ask how much notice you receive of the amount. Find out how discrepancies are challenged and whether an undisputed amount can be paid while a disputed balance is reviewed. Do not assume that querying an invoice suspends your payment obligations.

Read any audit clause carefully. It should be clear what records you must retain, who may inspect them and when you could become responsible for audit costs. Ask how both underpayments and overpayments are corrected.

Check late-payment interest, administration charges and retrospective adjustments. Also identify any power to change rates or calculation methods. Distinguish an agreed escalation formula from a clause allowing changes at the franchisor’s discretion, and have a franchise lawyer assess the implications.

4. Use South Africa’s legal protections before signing

South African franchising is specifically regulated through the Consumer Protection Act 68 of 2008 (CPA) and its regulations, alongside common law. There is no general requirement to register franchise systems; company registration is not approval of a franchise offer.

Section 7 of the CPA sets requirements for franchise agreements, including writing and plain, understandable language. Regulation 2 prescribes agreement information, including financial obligations. Regulation 3 requires a dated disclosure document, signed by an authorised officer, at least 14 days before the franchise agreement is signed.

Use that review period to compare the royalty provisions across the disclosure document, draft agreement and any fee schedules. Ask for inconsistencies to be resolved in the documents you will sign, not merely in sales correspondence.

Section 48 also prohibits unfair, unreasonable or unjust terms. However, a fee being commercially unattractive does not automatically make it unlawful. Obtain legal advice rather than relying on a future challenge to an obligation you do not understand.

Practical takeaway: Before committing, secure a written royalty definition, a reconciled example invoice and a low-sales cash-flow test. You should be able to explain exactly how each royalty payment will be calculated.