Jun 1, 2023
Fast food franchising in South Africa presents many opportunities ranging from hamburger chains and pizza places, to fried chicken restaurants. Given the ever-increasing popularity of fast food, it comes as no surprise that the largest franchises in the country are restaurant- and fast food brands. Moreover this popular industry ranks among the top three sectors that attract franchisees, constituting a significant 26% of the overall franchising landscape.
Current market size and growth trends
South Africa has a well-established and healthy franchising system that has established itself as a key player in the country’s economy. According to an IOL report, it’s estimated that there are 845 franchisors and over 40,000 franchisees operating in the sector. In 2019 the franchising sector contributed 13.9% to the country’s GDP (R734 billion). Notably, franchising makes a meaningful contribution towards solving South Africa’s most pressing problems – unemployment and poverty by creating job opportunities and fostering wealth creation. A research study conducted by Allied Market Research further highlights the growth potential of the sector, projecting the sector to reach an estimated $4.9 billion by 2026.
While franchising in South Africa presents lucrative opportunities, it also faces several challenges that hinder its growth and potential. Namely, slow economic growth, worsened by the lasting impact of Covid-19 lockdowns, which significantly impacted the industry as a whole.
Currently, the most pressing setback is load shedding which has led to substantial wastage and disruptions along the critical value chain. Franchisees, in particular, have been heavily impacted, as persistent power cuts have escalated the cost of doing business. They are now compelled to invest in alternative power sources to ensure their operations can continue uninterrupted.
Despite the strain that many businesses in the sector are taking, the sector is expected to experience considerable growth. This can be attributed to changing consumer preferences and eating habits and an increase in demand for different types of fast food products from consumers. BusinessTech reports that there are a number of reasons for this. Firstly, more South African households are choosing quick and convenient meal options because of today’s more “fast-paced lifestyle and busy work schedules”. Moreover, the rise of delivery services has made it easier than ever for consumers to enjoy fast food in the comfort of their own homes. Lastly, consumers today have more options than ever before as international fast-food chains enter the market and local businesses adopt the fast-food model.
Fast-food franchising offers many advantages to individuals looking to go into business. While the sector is known for big players like KFC, Nando’s and Chicken Licken, that charge in the millions for a new store; there are also great opportunities for smaller and upcoming businesses because of the low set-up costs.
Besides its cost effectiveness, the franchise system is a proven business model that provides added security to business owners. Franchise brands often have well-established products and services known to the market. This means the brand often comes with an already established brand name, brand recognition and customer base. Business owners can also avoid the struggles associated with starting a business as most brands come with a turnkey operation in place.
The biggest advantage franchising has to offer, however, is the formal training business owners receive, as well as the ongoing support in a franchise system. This support should include, among others:
Just like any other business in the country, there are legal requirements and regulations that fast food franchises in South Africa must comply with. The most common legal obligations that most business owners will have to deal with are business compliance, health and safety, tax and franchise agreements.
Compliance
To start, your business needs to be registered with the Companies and Intellectual Property Commission (CIPC) and be in possession of all the necessary business licences or permits or registrations required before trading in South Africa.
Read: The Basics of How to Register a Small Business in South Africa
Health and safety standards
Fast -food franchises fall in the food service industry which means there are certain standards that businesses need to adhere to. According to the Businesses Act, a business licence is required for any business “selling or supplying any foodstuff in the form of meals for consumption on or off the business premises, or any perishable foodstuff”.
Read: A Guide to Business Licences in South Africa
Additional regulations that businesses in the food service sector have to comply with are being in possession of health and safety permits, licences for the selling of liquor and tobacco, as well as zoning permits to operate in certain locations.
Read: Licensing And Permits For The Food Industry
Tax
The three types of taxes that franchise businesses pay, depending on their size, are corporate or turnover tax, employee taxes (PAYE, UIF and SDL) and VAT (value-added tax).
It’s important for franchise owners to know what type of small business tax they qualify for. Your business can qualify for turnover tax if it generates less than R1 million per year or trades as either a sole proprietor, a partnership, a close corporation, a co-operative, or a company.
Businesses can also qualify for taxation as a small business corporation (SBC) by SARS, if they meet following criteria: business turnover is less than R20 million per year, all shareholders in the business are natural persons and the business owner only owns the one business .
If your franchise is registered as a private company, it is required to pay Corporate Income Tax on its profits twice a year at a rate of 27%. Taxable profit is defined as gross income generated minus related tax deductible expenses. According to SARS, in addition to annual tax returns, every company is required to submit provisional tax returns (IRP6). The first of these returns is required to be submitted six months from the start of the year, and the second at year end, and must both contain an estimate of the total taxable income earned or to be earned for the full year.
See also: Find Out If Your Business Needs A Trade License
Value Added Tax (VAT)
When your small business is registered as a VAT vendor, you will need to charge VAT on all of the goods and services you sell to your customers. The VAT charge, or output tax, is 15% of your goods and services sale price. Although, certain goods are zero-rated, or exempt from VAT.
Businesses with a turnover exceeding R1 million in any consecutive twelve month period must register for VAT. If your small business is required to or has chosen to, register for VAT, you will need to submit VAT returns and payments every four months. These returns are due on the last days of June, October, and February.
Read: Small Business VAT Registration
Employee tax
Fast food franchises often operate with a sizable workforce, requiring the payment of various employee taxes. These include unemployment Insurance Fund (UIF), Pay-as-you-earn (PAYE) and Skills Development Levy (SDL).
UIF gives short-term relief to workers when they become unemployed or are unable to work because of maternity, adoption and parental leave, or illness. It also provides relief to the dependents of a deceased contributor.
Read: How to Register Employees for UIF
Businesses must also register for SDL which is a levy imposed to encourage learning and development in South Africa and is determined by an employer’s salary bill. The funds are to be used to develop and improve skills of employees. Moreover, employers are also required by law to deduct PAYE which is income tax from an employee’s taxable salary or wages.
All businesses are required to maintain accurate financial records throughout each year of assessment to ensure the accuracy of taxes declared and paid by your company.
Read: Tax Guide: Tax Filing For Entrepreneurs
Franchise agreements and disclosure documents
The Franchising Association of South Africa (F)ASA explains franchise agreements as legal documents that sets out all the obligations for both parties, and provides a guideline for how a franchisee will run a business. These agreement, according to Which Franchise, typically deals with the following issues: “intellectual and commercial property issues, operational details, financial arrangements and the initial and ongoing rights and obligations of franchisor and franchisee respectively”. The agreement also specifies what is to happen once the arrangement ends.
Read: What you Need to Own a Fast Food Franchise
Below are additional documents business owners may encounter when buying a franchise are:
Access the full guide: Read this Before You Buy that Franchise
There are a number of sources of financing available for entrepreneurs interested in owning a franchise, including loans, grants, and investment options
To start, financial planning is required to secure funding for franchise acquisition. Below are some of the costs business owners will need to plan for, according to the article ‘What You Need to Own a Fast Food Franchise’:
Your start up costs will include the expense of setting up your restaurant. According to the Entrepreneur Mag, the basic equipment you’ll need for a restaurant include: