Tech Fees by the Numbers
A data-driven look at funding technology to support franchise operations.
By Keith Gerson, CFE
In the first of a series based on an in-depth operational analysis of the franchising industry, the FranConnect “Franchise Operations Index,” we’d like to take a closer look at the use of franchise technology fees found in U.S. Franchise Disclosure Documents (FDD).
FranConnect undertook a comprehensive recent review of 2,191 FDDs over a three-year period to fully understand the types of fees franchisors are using, relating to a range of categories including:
- Total training hours
- Classroom training (vs. on the job)
- Initial franchise fees
- Technology fees
- Advertising fees
- Required local marketing
Value of Tech Fees
Technology fees have become the standard for ensuring a franchising organization can keep up with a rapidly evolving competitive environment. Technology fees are franchisee costs paid to a franchisor to add, update or upgrade required business tools and systems. “The goal of the tech fee is as a means to help franchisees run their business more efficiently and effectively,” said Kevin Wilson, CEO of Buzz Franchise Brands.
A decision to add or upgrade your technology can be a difficult test, if voluntary, between a franchisor and franchisees. Will the technology add value to the business? Will it bring in additional revenue? Will the franchisor share the costs?
“How a franchisor addresses technology fees is a great example of their strategic leadership for its brand and franchise network, and is a real difference-maker in the overall performance of the franchise system,” said Brian Schnell, a franchise attorney with international law firm Faegre Baker Daniels.
In a recent franchise study conducted by FranConnect, 50 percent of franchisees claimed “technology tools” were among the top values that a franchisor provides. Franchises are recognizing there may be limits to their expansion unless they keep pace with technology needs.
Technology is a true differentiator in a competitive retail environment. A franchise can rely on tech solutions to eliminate staffing challenges in a labor-intensive business, to expand their business, and save time and money. Not making the tech investment may limit revenue growth, profit margin and market share in their territory.
Buzz Franchise Brands’ Wilson explained that his organization collects approximately $350 per month per franchise and allocates it for technologies including their VOIP phone system, their franchisee websites, FranConnect (for their communications intranet, royalty management, field ops and customer CRM), a mystery shopping service over phones, and basically anything in technology that has a parent/child relationship (such as Facebook) so Buzz Brands has controls to ensure consistency.
How Many Franchisors Charge Technology Fees?
Based on the FranConnect FDD database analysis, 61.9 percent of all franchisors now collect technology fees. The technology fees requirement is a consistent range regardless of the number of franchise locations:
- Less than (<) 26 franchises: 60.2%
- 26-100 franchises: 61.8%
- 101-799 franchises: 65.4%
- 800+ franchises: 59.8%
Franchises that have an established technology fee that use a monthly recurring flat-rate charge represents 60.4 percent of the sample size, with only an additional 1.5 percent utilizing a fee based on a percentage of revenues.
Broken down by industry, the FranConnect study highlighted:
The median tech fee was $1,500 annually ($125 monthly), with a $900 to $3,420 common spread ($75 to $285/month), and no appreciable correlation to revenue growth. There was a significant correlation between tech fees of $2,200 to $2,500 ($733 to $833/month) and lower location growth. Those in automotive that charge tech fees make up 65.4 percent of the category.
Median tech fees were $1,872 annually ($156 monthly), with a $1,000 to $3,600 common spread ($83 to $300/month). There was no appreciable correlation to revenue growth or location growth. Of the select few using a revenue percentage fee, median tech fee was 2.25 percent, with 1.75 percent to 2.5 percent common spread. Those in business services that charge tech fees make up 54.5 percent of the category.
Commercial and Residential Services:
The median tech fee was $1,908 annually ($159 monthly), with a $1,085 to $3,978 common spread ($90 to $332/month). Higher tech fees tend to have higher location growth rates in this category. Those requiring tech fees in this category make up 60.2 percent of this segment.
Technology is extremely important in this category; there is a lot at risk given the investment cost and annual revenue generated per room. This can readily explain why franchisors are at an $8,616 annual median tech fee ($718 monthly), with a $6,612 to $38,811 common spread ($551 to $3,234/month). A much smaller percentage of lodging franchises use a percentage factor, amounting to 1.4 percent, with a 0.8 percent to 1.475 percent common spread. A whopping 89.9 percent of franchisors in lodging are now charging technology fees.
The median tech fee was $2,388 annually ($199 monthly) with $1,137 to $4,200 common spread ($95 to $350/month). In this large category, there are only three brands that utilize a tech fee as a revenue percentage, amounting to a 0.9 percent median tech fee, with a 0.675 percent to 1.00 percent common spread. Those charging technology fees now make up 67.5 percent of the total franchisors in this category.
Quick Service Restaurants:
The median tech fee was $2,014 annually ($168 monthly) with a $1,200 to $3,990 common spread ($100 to $333/month). A regular flat-fee is the norm. In the sample, only two firms charge a percentage of revenues, amounting to a 2.7 percent median rate. Across all QSRs, royalties tend to be on the lower side, at a 5 percent median rate. Those that charge tech fees in the QSR segment represent 58.6 percent of the total category.
All but one franchisor assesses a flat-rate technology fee, at a $2,000 annual median ($167 monthly), with a $460 to $3,564 ($38 to $297/month) common spread. Today, 61.4 percent of real estate franchisors are now charging tech fees.
The median tech fee was $1,600 annually ($133 monthly), with a $1,194 to $3,672 common spread ($100 to $306/month). Two outliers charge a percentage of revenues, with a 1.2 percent median tech fee and a 0.75 percent to 1.65 percent common spread. This category has the lowest percentage of franchisors charging a tech fee at 53.5 percent of the total.
Retail Products and Services:
The median tech fee was $1,800 annually ($150 monthly), with a $1,000 to $3,360 common spread ($83 to $280/month). Only one business charged based on revenue percentage (4.25 percent). Within the category, franchisors charging tech fees represent 69 percent of the total.
The Bottom Line
The assessment of an ongoing technology fee is now a franchise industry norm. If you’re not charging a tech fee, you may be at a significant disadvantage. “The technology that is used now and the technology fees will not be adequate to do what’s necessary to grow, protect and evolve a franchise system where a brand’s customers are expecting and demanding change,” Schnell said.
Whether or not franchisees accept it, tech fees are here to stay. “The challenge is to address the technology fee in a way that legally gives the franchisor the ability to do what is necessary from a technology standpoint over the term of the franchise agreement,” explained Schnell. To manage expectations, franchisors should listen to franchisees for more insights into the type of technology addition or upgrade that may be useful to their business. “I can’t imagine any part of the business today where technology isn’t required,” Wilson added.
*The above data comes from the FranConnect Operations Benchmarking Report which also includes data and insights on classroom and field training, franchisee support, advertising, local marketing fees, royalties and more. To access the full report, go to franconnect.com/OpsBenchmarks.
Keith Gerson, CFE, is President of Franchise Operations and CMO for FranConnect. Learn more about FranConnect here.