Franchise Buying Guide

Franchise Roadblocks

Situation No. 3
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

The Salesman Is a Broker
A couple looking for a franchise surfed the Net for information on what was available. They were both schoolteachers who had never bought a business and were intimidated by the pressure they felt in just researching franchise opportunities. Late one night, they discovered the Web sites of a few professional service firms offering to coach them toward the perfect franchise. Even better, they thought, these firms weren't even charging a fee--they were paid by the franchisor only when people actually bought a franchise.

The coaching firms all claimed they had researched thousands of franchise opportunities and selected several that met their criteria for return on investment, failure rate and other important attributes. The couple was sold. Through a lengthy interview, the advisory firm they selected was able to narrow the list of franchises that seemed right for the couple down to a few. The consultant then introduced the couple to the franchisors. During the coaching session, the couple was provided with information on what they should be looking for in a franchise opportunity, so they felt prepared to ask the right questions when they met the franchisor.

Somewhere during the process, they picked up a copy of Franchising for Dummies and saw that Dave Thomas and I had recommended not working with franchise brokers. It was then that they understood that their "coach" was really a "broker," and, while he was advising them, in reality he had been hired by franchisors for the sole purpose of convincing franchise shoppers to buy from his clients.

They truly thought that the broker had helped them and prepared them for the task of buying a franchise, but they were concerned, since they were about to invest their life's saving based upon this broker's advice.

Dave and I had a lot of reasons for making our recommendation about brokers. The most important: Brokers try to appear independent to the prospective franchisees, claiming to be franchise counselors and coaches and even calling the prospective franchisees their clients. They emphasize that they're helping the franchisee make a selection that's right for them, when they work for and are the agents of the franchisor. They typically steer the prospect only to their clients so they can earn a commission on the sale. In the age of Enron, it's obviously dangerous to take advice someone who has a clear conflict of interest.

I looked at the list of franchisors the broker "picked" for the couple. Then I had the couple research all the other franchise offerings in those industries--they were able to do so quickly and cheaply by going to Web sites like this one. I asked them to make their franchise decision based upon complete facts and not only limit themselves to the few companies the broker had recommended.

The broker told them that if they were serious about buying a franchise, they should be prepared to make a decision in two to four weeks. I said they should take their time, and the process, done right, would likely take four to six months from beginning to end. What they found by doing the research themselves was a much broader franchise offering than the broker had led them to. Through their research, they discovered several alternatives that offered different fees, services and brand personalities and, in some cases, a better return-on-investment potential. Some of the franchisors were more established, and some had new and exciting possibilities that the brokers clients didn't. I strongly recommended, however, that they not discount the broker's recommendations entirely, since some of those franchisors were also good candidates for them. Ultimately, the couple made their franchise selection based upon their research.

The moral: You should use an advisor who works for you, not the franchisor. Call local franchise lawyers. And remember, franchise brokerages are fairly unique in the business world in that they try to convince a buyer they work for them, while they're really a commissioned agent of the seller.

If you've had problems during your franchise search, and would like your real-life situation answered or possibly discussed in a future column, e-mail your story to me at mseid@entrepreneur.com.


Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid co-wrote Franchising for Dummies (IDG Books) with Dave Thomas, the late founder of Wendy's, and serves on the International Franchise Association's Board of Directors.

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