Businesses are increasingly defined by the technologies they use internally or that they offer to their customers; franchisors are no exception Technology is interwoven into the way that businesses think about themselves and the world. For example, Amazon famously declared itself first a technology company that “just happens to do retail.” Developments in technology distinguish companies from their competition and open new growth opportunities.
Your franchise business likely depends of an array of systems to interact with customers, provide goods and services, and link franchisees to you and each other. Or, perhaps, those advancements are still aspirations for your system, and you want to leave the door open to introduce those technologies later.
Having the technology fee disclosed in your Franchise Disclosure Document (“FDD”) and included in your Franchise Agreement provides you with the flexibility to implement technologies systemwide and have your franchisees help bear the cost.
Benefits of the Technology Fee
The first and most obvious benefit of the technology fee is the innate benefit received from the technological tools you choose to implement. These can increase your effectiveness and efficiency in operations, marketing, sales, management, and communications. The technology you offer your franchisees sets you apart from other franchise systems they can choose, and helps make franchisees more profitable.
Second, the technology fee helps spread the costs for new technologies. Often franchisors bear a large share of the costs to add, upgrade or alter technology that benefit the whole system. The technology fee shares those costs with the franchisees. Cost-sharing may allow you to implement technology you could not afford to provide independently, and which it would be impractical for your franchisees to purchase individually.
Third, the technology fee can be drafted generally so that the franchise system can adapt to marketplaces changes without requiring modifications to the franchise agreement. For example, if the franchisor did not contemplate having a mobile application at the time the franchisee joined the system but now wants to develop one, the franchisor has the funds from the technology fee to do it without an amendment.
These benefits need to be communicated to your franchisees. Most importantly, franchisees must be able to clearly see how the technology you will provide will be a critical solution for their business.
Key Components of a Well-Drafted Technology Fee Provision
The description of the technology fee in Item 6 and the provision in the franchise agreement should accomplish the following:
- Allow the technology fee to be increased based on the costs of the technologies being provided. Notice should come before the increase, but you must be able to adapt to changing costs. Note that some state regulators will require you to identify a maximum fee that you will charge.
- Reserve the right to create the technology fee and set the fee amount in the future, if the you are not currently charging one. It is impossible to know what technology developments may help, if not revolutionize your business in the future so it’s always best to give yourself the option to implement the fee.
- Enable you to collect the fee in different ways and at different times. Here again, flexibility allows you to adapt to market and system changes.
- Allow the technology fee to be spent on any type of technology, whether it be proprietary or from a third party. Technology can touch every part of the internal operations of the business and the customer experience with the business, from phones to customer portals, and websites to ordering systems. If the solution makes sense for you and for your franchisees, you should be able to provide it.
- Paid to the franchisor or the franchisor’s affiliated company. Even if the technology is wholly delivered to the franchisees through a third party, the technology fee will be paid to you. You can then pay the technology providers. Keeping the technology fee between you and the franchisees maximizes your options to add and modify the tools you are providing to franchisees without having them develop separate relationships with approved suppliers.
The team at Manning, Fulton & Skinner can help you determine how the technology fee fits into your business model and prepare the modifications to your FDD so that you and your franchisees can benefit from current and future technologies.