Setting Franchise Fees for Your South African Business

Franchising an established business means pricing more than permission to use your name. Your fees must fund the support you promise while leaving franchisees with a commercially workable business. For South African owners entering the franchising community, the strongest starting point is a costed service commitment, not a competitor’s advertised royalty.

1. Separate joining costs from ongoing support

Start by listing what you will deliver before opening and what you will provide throughout the relationship. Allocate each cost once: charging through several different fees for the same service makes your offer harder to explain and assess.

An initial franchise fee might contribute towards site assessment, initial training, opening assistance and access to your business system. However, do not assume it should recover every rand spent developing the franchise package from your first franchisee. Development expenditure benefits future outlets too.

Build a separate schedule for recurring support, including:

• Field visits, travel and operational coaching.
• Refresher training and training administration.
• Technology support and system maintenance.
• Quality checks and franchisee communications.
• Central administration and specialist advice.

Distinguish central costs from costs that increase with each outlet. A support manager’s salary may initially be largely fixed, while travel and software licences can rise as your community grows.

Also identify expenditure paid directly by franchisees, such as premises deposits, equipment, stock and professional fees. These are part of their investment requirement, but should not be confused with your franchise fee.

2. Choose a royalty basis you can explain

A percentage-of-sales royalty moves with turnover, but it does not automatically move with profitability. A franchisee can owe a substantial royalty while facing high rent, wages or delivery charges.

A fixed monthly fee offers predictability, yet can place disproportionate pressure on a newer or quieter outlet. A hybrid structure may combine a base fee with a sales-linked element, but additional complexity needs a clear commercial justification.

For each option, specify the calculation precisely. If you charge on sales, decide how the agreement will treat VAT, refunds, discounts, online orders and sales through third-party platforms. Explain whether platform commissions are deducted before the royalty is calculated. Avoid using “turnover” without a definition.

Document when fees become payable, what sales information must be submitted and how discrepancies will be resolved. Have your accountant check VAT treatment and ensure quotations clearly distinguish VAT-inclusive and VAT-exclusive amounts where applicable.

Your benchmark should be the cost and value of the support package. Competitor fees are useful context, but may conceal different services, supplier income or additional charges.

3. Test affordability from both sides

Prepare two linked budgets: one for the franchisee and one for the franchisor. A fee structure is not sustainable if either party depends on unrealistic growth.

For the franchisee, test the combined burden of royalties, marketing contributions, compulsory technology charges and other recurring payments. Include a realistic owner-manager wage, working capital needs and financing costs rather than treating everything left after operating expenses as disposable profit.

For the franchisor, ask whether recurring income can fund the promised support when only a few outlets are trading. Initial fees arrive irregularly; they should not become the only way to pay for ongoing obligations to existing franchisees.

Run slower-sales and delayed-opening scenarios. Consider whether geographically dispersed outlets require more travel than your original budget allows. If the model fails, adjust the support design, expansion pace or fee structure before offering franchises—not through unexpected charges afterwards.

Record the assumptions behind each calculation. These working papers help your advisers assess whether the proposed fees and financial representations are defensible.

4. Put the full fee structure into compliant documents

South Africa specifically regulates franchise agreements through the Consumer Protection Act 68 of 2008 (CPA) and its Regulations. There is no general registration requirement for franchise systems, but that does not remove contractual and disclosure obligations.

Section 7 requires franchise agreements to be in writing, signed by or on behalf of the franchisee, and written in plain, understandable language. Regulation 2 prescribes agreement content, including the consideration payable. Section 48 prohibits unfair, unreasonable or unjust terms.

Ask a South African franchise attorney to align your fee schedule, agreement, disclosure document and sales materials. Regulation 3 requires the prescribed disclosure document to be supplied at least 14 days before the agreement is signed. Separately, section 7 allows a franchisee to cancel in writing, without cost or penalty, within 10 business days after signing. Do not describe an initial payment as unconditionally non-refundable.

Where you collect marketing contributions, obtain advice on the specific regulatory requirements for advertising funds, including their administration and reporting. Explain what the fund pays for and distinguish pooled marketing from local advertising obligations.

Finally, make fee increases, renewal charges and transfer charges transparent, with their triggers and calculation methods clearly stated.

Practical takeaway: Before advertising your franchise, prepare one complete fee schedule, cost every promised service and test affordability for both parties. Have your accountant and franchise attorney review the same version.