Franchise brand funds, rebates and tech fees outside restaurants

In fitness, home care, education and auto service, the friction is not the royalty. It is the brand fund, the supplier rebate and the tech fee.

Outside restaurants, the royalty is the number everyone argues about and the least interesting line in the relationship. The money that causes friction sits in three other places: the brand fund, the approved-supplier program, and the technology fee. A franchisor in fitness, home care, tutoring or auto service controls all three. Franchisees pay for all three. And each one is disclosed in the Franchise Disclosure Document in enough detail that a careful buyer, lender or PE deal team can test it.

We covered restaurant systems in where QSR franchise systems leak margin. This is the other half of franchising: service and retail concepts where there is no food cost to hide behind, and the franchisor's commercial levers show up more plainly in the franchisee's P&L.

The brand fund: ask what share is working media

The FTC Franchise Rule is specific about the ad fund. Item 11 requires the franchisor to disclose who contributes, whether company-owned units contribute on the same basis as franchisees, who administers the fund, whether it is audited, whether franchisees can see its financial statements, and how the money was used last year, including the percentages spent on production, media placement and administrative expenses. It also asks what share of the fund goes to selling new franchises.

That last split is the one to read first. A brand fund is franchisee money spent on the franchisor's behalf. The share that buys media is the share that drives traffic to their doors. Everything else (production, agency retainers, the franchisor's own marketing staff) needs to earn its place.

The range is wide. A paper presented at the IFA's 2024 Legal Symposium reviewed a sample of FDDs and found disclosed administrative allocations running from 0.5% to 18% of annual fund spending. The same paper notes that fund dollars can pay marketing employee salaries, travel and conference costs, and that many franchisors do not audit the fund at all, offering unaudited accountings on written request instead.

Contribution rates have settled into a band. Franchise Update Media's 2025 marketing leadership report found most franchisors take 1% to 2% of franchisee revenue for the national fund, with about a third of brick-and-mortar service franchisors at 3%. Digital advertising took the largest share of national fund spending in every sector, with paid search the most common line.

Governance is thinner than the word "council" suggests. In every FDD the IFA authors reviewed that described an advertising council, the council was advisory only. The franchisor kept final authority and could form, change or dissolve it.

Done well, the fund is a growth engine franchisees will pay more into. Planet Fitness disclosed in its fiscal 2025 10-K that its franchisees voted to raise the national advertising fund contribution from about 2% of dues to 3% for 2026, while local marketing spend drops from 7% to 6%. That is a franchisee base choosing to centralize money, which only happens when they trust where it goes.

The questions that separate a good fund from a tax:

• What share of last year's fund was working media, and how is that trend moving?
• How is the agency paid: retainer, percentage of media, or both? Who owns the media contracts and the data?
• Which franchisor salaries are charged to the fund, and on what allocation basis?
• Is the fund audited annually, and do franchisees get the audit without asking?

If you buy media yourself, the agency fee questions are the same as for any brand. See how much to pay a media agency.

Approved suppliers: the rebate is disclosed, the price often isn't

Item 8 covers required purchases. The franchisor must say whether it or its affiliates earn revenue or other material consideration from franchisee purchases and, if so, the precise basis, its total revenue, the revenue from required purchases and that revenue as a percentage of the total.

Rebates are legal and common, and most franchisee challenges to disclosed rebates have failed, according to the IFA's 2023 symposium paper on supplier economics. It cites Planet Fitness, where supplier rebates averaged about 1.59% of average club revenue in 2017 and franchisees were offered a "rebate to royalty swap" that moved the royalty from 5.00% to 6.59%. A sizable majority accepted. Planet Fitness's current 10-K says franchisees must buy their equipment from the company and generally re-equip every five to nine years.

The federal rule asks for aggregate revenue, not the price franchisees pay against the open market. Some states go further. Maryland requires additional Item 8 detail, including the franchisor's cost and prevailing market prices. Washington and Hawaii require supplier restrictions to be justified on business grounds, and Iowa and Indiana limit exclusive sourcing. The same IFA paper found no state law that forces a franchisor to pass rebates through.

For a multi-unit franchisee, the useful test is simple: price the ten largest required purchases against the open market once a year. For a franchisor, the useful test is whether the program would survive that exercise.

Technology fees: the fastest-growing complaint

Item 11 also covers required computer systems. The franchisor must disclose the cost of the system, any obligation to upgrade during the term (with any contractual limits on frequency and cost), the annual cost of maintenance and support contracts, and whether the franchisor can access the data independently.

Technology fees are where franchisees feel the most drift. When the FTC issued its July 2024 franchise policy statement and staff guidance, it said the more than 2,000 comments it received described rising payment processing and technology fees that made it hard to earn a living, alongside undisclosed charges for training, marketing and required products. The staff guidance states that a franchisor imposing a fee not disclosed in the FDD and included in the franchise agreement may be an unfair practice, including when it is added "through its operating manual." It leans on the FTC's old Orkin case, where unilaterally raising a fee fixed by contract was held unfair.

The tech fee usually bundles third-party software, the franchisor's own platform and a margin. Franchisees can't see the split. Franchisors that publish a cost-plus breakdown take the argument off the table.

How franchisees read all three

Franchisees add these levers up and compare the total with what they get. In auto services, the history is long: Broussard v. Meineke, a fight over the handling of advertising funds, produced a $390 million judgment that the Fourth Circuit reversed in 1998.

For a PE sponsor, this is diligence and value creation in one place. The brand fund, rebate income and tech fee margin sit in the franchisor's revenue, and each depends on franchisee goodwill that a buyer's quality of earnings work rarely prices. See our PE value creation approach.

Where to start

Pull the last three FDDs and lay Items 6, 8 and 11 side by side: fund percentages by category, supplier revenue as a share of total, and every technology charge with its stated annual cost. Then book a four-week Diagnostic to price the fund's working media share, the agency contract and the ten largest required purchases against market before the next FDD renewal.

Sources: eCFR, 16 CFR 436.5 Disclosure items (FTC Franchise Rule), FTC, July 12, 2024 press release on franchisee complaints and illegal fees, FTC, Staff Guidance on Undisclosed Fees, IFA Legal Symposium 2024, Marketing Funds and Local Marketing: Do's and Don'ts, IFA Legal Symposium 2023, Commissions, Rebates and Disclosure: Oh My, Franchise Update Media, Marketing Byte: Looking at Franchise Marketing Funds, Planet Fitness, Form 10-K for fiscal 2025.