In my recent experience, most franchise start-ups and emerging systems typically charge a technology fee or, at a minimum, reserve the right to charge a technology fee in the future.   These fees are easily justifiable.  Franchisors are routinely creating, developing, managing, and upgrading software programs, websites, phone systems, online platforms and similar technology solutions used by the system franchisees to effectively run their businesses.

As detailed in a recent issue of Franchising World by Keith Gerson, FranConnect undertook an interesting review and analysis of the use of technology fees in over 2,191 franchise disclosure documents over a three year period.  It found the following:

(1) 61.9% of all franchisors now collect technology fees.

(2) The vast majority of franchisors (60.4%) have a set fee while only 1.5% utilize a fee based on a percentage of revenue.

These statistics track experiences with our clients in recent years as well.  If your franchise system does not charge (or reserve the right to charge) a technology fee, your ability to adapt to changes in the marketplace may be impeded.   We represent a fair number of franchisors who will absorb (or at least share) in the cost of initial major technology overhauls that benefit franchisees.  However, this option is often only possible for very developed franchise systems.   Most franchise systems need the ability to shift the costs of new or improved technology to the franchisees.  This is an equitable allocation of costs, as franchisees will benefit from the technology on a daily basis.

How a system addresses the technology fee varies dramatically from franchisor to franchisor.  From a legal perspective, this means reserving rights in the franchise agreement with maximum flexibility as to cost and terms of collection (like timing and ACH withdraw when royalties are drawn).   Adequate disclosure in the FDD under Item 6 is also important.  Franchisors should keep in mind that state regulators could require the disclosure of a numerical value or limit placed on the amount a franchise system may collect.

However, there are considerations beyond the legal. Keeping the lines of communication open with franchisees is key.  Franchise systems must be able to articulate sufficiently why the technology is important.  Showing how it will increase efficiency, generate additional revenue in the long-term, or solve an existing logistical problem for the franchisees is critical.   If franchisees do not see the value to their business operations, then it may lead to disgruntled franchisees.  When the need for new fees is not adequately “sold,” then it can result in accusations that the franchisor is trying to unfairly shift its own cost of doing business or “wasting” franchisees’ hard earned profits.