Resolving the Controversy of Franchise Brokers
by Ed Teixeira
In a report by Franchise Update Media Group, 57% of the franchisors
responding to the survey reported using franchise brokers. Despite the use of
franchise brokers by franchisors their use remains somewhat
of a controversy. This article explains why.
The use of franchise brokers by franchisors has grown dramatically over the
past 10 years. Industry sources indicate that over 50% of franchisors use
franchise brokers. By franchisor brokers, I refer to firms with a broker network
versus the sole proprietorship. The use of franchise brokers is not limited to a
particular size franchisor; franchisors both large and small use franchise
Start-up franchisors utilizing brokers can receive a boost in starting up
their franchise system. The challenge is that many franchise broker firms are
reluctant to market franchises represented by a brand new franchisor. In fact,
if a franchise broker is willing to include a start-up franchisor in their
portfolio one could question the judgment of the broker group since the start-up
has no franchise history or performance.
Whenever, Iím asked about using franchise brokers I explain that franchise
brokers can be a benefit, however, their service is limited to providing the
franchisor a completed application from a qualified prospect. This means that
the heavy lifting of the sales process is left to franchisor staff. Also most
broker groups require a minimum commission of 12-15K per completed franchise
transaction. Since the franchise broker only gets paid when the franchise fee is
actually paid to the franchisor, this arrangement would appear to be a
reasonable business relationship. If this is the case why donít more franchisors
use brokers? Why do some franchisors totally dismiss the use of brokers?
Here are some reasons why franchisors donít use a franchise broker:
- Since franchise brokers
receive a commission for each transaction the broker may try to steer a
candidate to a particular franchise opportunity, which may not be the best fit
for the candidate and franchisor.
- Itís difficult to control
what the broker is saying and disclosing to the prospect. An overzealous broker
could create negative fallout for the franchisor.
- Some franchise candidates
may have an aversion towards a franchisor that uses brokers.
- The franchisor must still
employ and engage sales staff to complete the bulk of the sales process. Since
their time represents a true cost it adds to the cost of the broker commission.
- Some franchisors add the
projected broker commission to the initial franchise fee. This will mean less
working capital for the new franchisee to develop the business.
- Although the broker
commission is paid when the transaction is completed there is still a cost to
the franchisor staff in communicating with brokers and working with prospects.
- Franchisors can receive
sufficient leads from the Ad Portals and their own corporate site if they are
willing to commit the funds.
- An individual franchise
broker is motivated by a commission and does not work for the franchisor. There
is no continuing relationship.
- The sales performance of
franchise brokers is mixed. Survey a group of franchisors and youíll receive
mixed responses. Some report poor results while others claim success using
Franchise brokers can be a useful resource for franchisors looking to grow
their network. However, a large number of franchisors are reluctant to engage
brokers for the above reasons. Perhaps, some broker companies will identify ways
to overcome the concerns that some franchisors have towards using franchise
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached