Should You Use Franchise Brokers?

How They Work

While brokers can clearly serve a valuable function, their role had been the subject of some controversy within franchising. This controversy is, at least in part, a function of the way in which they market themselves.

The typical brokerage network--which in some cases is a franchise itself--will market individual brokers as "franchise consultants," implying to some less sophisticated prospects that they are acting in the best interests of the prospective buyer and providing the buyer consulting advice. And while there is an element of truth to this, a fuller understanding of the facts illustrates that brokers are not the unbiased buyer's advocates some brokers may lead their prospects to believe.

To start with, the typical franchise brokerage network may represent a hundred or more franchise opportunities. Each of the franchisors they represent will pay them a success fee--usually ranging between $10,000 and $15,000--if an introduction made by the broker results in a sale.

Since these firms represent perhaps 100 to 200 franchisors, their "consultants" have limited the franchise buyer's "choices" to less than 10 percent of the franchise universe, so they clearly cannot be entirely objective.

Brokerage firms, of course, will argue that they screen their franchisor clientele and choose the "best of the best" to represent. But while some brokerage firms are serious in their desire to represent the best, others may be more interested in franchisors that pay the best commissions, the franchisors with the highest close rates (if the franchisor cannot sell, of course, the broker gets no commission) or simply the best franchisor available in a category (some franchisors may work with limited numbers of brokers, limiting other brokers to the second best). And, since not every franchisor wishes to be represented by brokers, some good franchisors are, by necessity, excluded from even the most well meaning broker's analysis.

Once the brokerage network has secured its franchisor clientele, the individual brokers are then charged with finding prospective buyers and matching them to the best franchisors. The broker conducts franchise buying seminars, uses the internet or simply networks to find prospects. They qualify these prospects financially and try to determine their strengths, weaknesses and skills. They then generally make recommendations to multiple franchisors simultaneously--usually between three and five--in the hopes that their prospect buys any of the recommended franchisors. Because regardless of which franchisor is chosen, brokers receive their commission.

While the idea of finding an "ideal match" for prospective buyers again sounds good in principle, individual brokers are often motivated by factors outside the buyer's best interests. Franchisors may pay different levels of fees, providing one clear-cut motivation. Some franchisors offer broker spiffs--ranging from bonuses to free trips to Hawaii. And of course, the broker doesn't get paid unless the franchisor closes the deal, so proven closers always rank high on the broker's short list when it comes time to make recommendations.

Again, it's important to emphasize that many brokers do have a genuine concern for their franchise buyer "clients." But even the most altruistic broker will, at a minimum, be subjected to the kinds of outside factors discussed above.

Mark Siebert is the CEO of the iFranchise Group, a franchise consulting firm that has worked with 98 of the nation's top 200 franchisors. He can be reached at 708-957-2300 or at info@ifranchise.net.
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