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What to Know Before
Using Franchise Brokers

by

Itís estimated that 50% of franchisors utilize franchise brokers to assist in the sale of their respective franchises. When, properly utilized franchise brokers can provide a valuable service for individuals looking to buy a franchise, especially individuals unfamiliar with franchising.

Industry Overview

Several franchise broker firms dominate the broker landscape and each can represent over 200 franchise opportunities. In most cases, brokers receive a flat fee or a percentage of the franchise fee from the franchisor when the sale is completed. Individual brokers and broker networks are brokering franchise sales on behalf of franchisors. The prospect does not pay any monies to these brokers. The choices that franchise brokers present to prospects are limited to a select number of franchisors, which pay the brokers to sell their concept. Some brokers may refer to themselves as franchise consultants, which may not be totally accurate.

However, even within the franchise broker network there are differences. Some networks use franchisees or licensees to market in specific territories, while others use a network of brokers that operate under their own company name. In this case the broker has more independence and may tend to follow his or her own process.

There is an exception to these franchise brokers, namely, the true franchise consultant who is engaged and paid by an individual to locate, evaluate and recommend a franchise opportunity. These consultants represent the individual and not specific franchisors and as such receive no commission or payment from franchisors.

Some Franchise Broker Networks Follows a Process

The more popular and large franchise broker networks typically follow a specific process:

  • The individual completes a questionnaire that profiles the prospect and identifies specific personality traits. Included is a financial profile. The intent is to enable the broker to identify the right category of franchise for the prospect.
  • The next step is usually a personal meeting to identify what types of businesses the prospect likes and dislikes.
  • Since the broker represents specific franchises, the choices that the franchise broker presents will be limited to the franchisors they represent, which pay the brokers to sell their concept.

How to Use a Franchise Broker

There are a number of franchise broker companies that provide a valuable service to individuals who are looking to acquire a franchise. Some key advice is to know what you want, do your homework and don't exceed your investment capabilities.

Here are some tips to follow when using a franchise broker:

  • Know the type of franchise you're interested in before contacting the broker. Since the brokers donít require exclusivity you can use more than one. A word of caution: If a broker uses high pressure or requires an exclusive arrangement, avoid them.
  • Confirm that youíre dealing with legitimate professionals by checking biographical data, track records and references
  • Do your home work on the subject of franchising before you get started. There are ample resources available from the International Franchise Association and other sites on the Internet.
  • Keep in mind, that franchise brokers do not represent the entire universe of franchise opportunities.
  • Since franchise brokers represent a number of franchisors and receive a commission for each transaction some brokers may try to steer you to a particular franchise opportunity.
  • The franchise broker can be a data gathering source for specific franchise information. Utilize the broker to provide you with key information pertaining to the franchises that appeal to you. This can save you valuable time and will serve to measure how knowledgeable the broker is.
  • Be sure to stick to your financial capabilities. Purchasing a franchise can be somewhat similar to buying a house. Don't exceed your financial capabilities, because a particular franchise opportunity dazzles you.
  • As with any important decision, you need to perform your own due diligence. Utilize your attorney and accountant to review the franchisorís Franchise Disclosure Document (FDD).
  • Most importantly, be sure you take to time to speak with current and former franchisees

Franchise brokers can be a helpful resource for individuals looking to purchase a franchise. However, itís important to remember the role they play in the franchise process and how they are paid.

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com

 

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