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 brokers.

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, I’m 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 don’t more franchisors use brokers? Why do some franchisors totally dismiss the use of brokers?

Here are some reasons why franchisors don’t 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.
• It’s 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 you’ll receive mixed responses. Some report poor results while others claim success using brokers.

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 brokers.

© 2011 FranchiseKnowHow, LLC

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