Mark Siebert delivers the ultimate how-to guide to employing one of the greatest growth strategies ever -- franchising. Siebert shares decades of experience, insights, and practical advice to help grow your business exponentially through franchising while avoiding the pitfalls. In this edited excerpt, Siebert explains the pros and cons of referrals and brokers.
In franchise sales, not all leads are created equal. While the internet is the most prolific producer of franchise sales leads, if you really want to see a salesperson’s eyes light up, start talking about referrals. By that, we mean recommendations by existing franchisees, suppliers, or other people “in the know” about the value of your program. We also include people who've seen your operation and are so impressed that they inquire about your franchise program -- even though they weren't technically referred by anyone.
Leads from genuine referrals have some of the highest close rates in the industry. Prospects who come to you through a referral almost always have a greater level of interest than other prospects and are far less likely to aggressively “shop” with your competitors. Moreover, referral leads view the franchisor with greater credibility and are thus easier to close.
The best generator of quality referral leads will ultimately be successful franchisees who've already invested in the system. The number and quality of referrals generated by the franchisee community will be in direct relation to the success franchisees enjoy and the franchisees’ respect for the franchisor’s support organization. Moreover, successful franchisees who trust their franchisor will also want to open more locations themselves and be less inclined to look for new business investments outside their current franchise system.
Any good franchisor should also inform its staff and relevant business associates about the advantages of the franchise, the skills it's looking for in its franchisees, and the costs of the program. They should ask employees and other associates to provide the names and relevant contact information of prospective franchisees. You can strick gold by targeting employees, customers, dealers, salesmen, bankers, and even attorneys. Each of these groups is likely to have a good knowledge of the business and the management team behind it, providing solid credibility in the sales process.
Surprisingly, some of the best referrals may come from people you've only recently met. One great source is the franchisee of a noncompeting system who's looking to join your network. Not only is this person likely to be financially and operationally qualified, but chances are, they know dozens of similarly situated prospects who'd be eager to hear about a great business opportunity. In short, every new contact can be a source of referral leads. So it boils down to two simple steps: Network at every opportunity, and ask.
If you already have a number of franchisees in place, recruit them as a source of referrals. Typically, they're proud of how smart they were to have joined your network and of what they've accomplished, so they're usually thrilled to talk to prospects, especially if the prospect is in a different region. Such franchisees are some of the best salespeople you'll ever find. They love to talk about their businesses, and they have instant credibility with prospects who'll know their enthusiasm is based on real experiences.
If you're targeting a market near a qualified franchisee, call them and discuss your plans to add a new neighbor. Some novice franchisors may fear this call, thinking the franchisee may complain they're being encroached upon. But this call provides you with an opportunity to emphasize what everyone will gain from network expansion. Educating your franchisees about the advantages of systemwide growth -- increased buying power, advertising power, brand awareness, support services, and an improved ability to resell their business -- will often soften the blow while depriving them of the chance to complain that they “never knew.”
At the same time, this call provides an opportunity to ask the franchisee if they know anyone who'd be a good prospect for that territory. Assuming your franchisee doesn't want to invest themselves, they may provide you with referrals to friends or relatives who might. Your franchisee certainly has as good an understanding as anyone of what it takes to succeed in your business, and by having input into their new neighbor, they're far more apt to develop a collaborative relationship with them.
One way to further motivate people to provide these referrals is to pay referral fees for franchisees that end up signing with you. While there's nothing illegal about these fees, and many franchisors use referral programs, they may trigger some disclosure obligations -- so be careful to speak with your franchise attorney before implementing them. Moreover, if you're thinking about paying referral fees to your franchisees, you'll need to exercise extra caution. Franchisees aren't generally bound by the same disclosure rules as you, so they can speak openly to franchise prospects about sales and earnings. But if you compensate your franchisees for referrals, there's an argument to be made that they now have a conflict of interest and shouldn't be having this discussion. So again, speak to your franchise attorney about how such a situation might work.
Franchise brokers, also known as lead referral networks (LRNs), have one basic role: to provide prequalified leads to associated franchisors, generally in return for a success fee that's paid once the sale closes. A typical broker will represent numerous franchisors -- often hundreds of them -- and will act as a matchmaker by finding and funneling prospective franchisees to franchise companies that are a good fit. And while a broker can add some third-party credibility, once the selling starts, the broker will exit the picture and leave the heavy lifting (i.e., making the actual sale) to the franchisor. Thus, the broker isn't part of the franchise sales process but is instead an extension of the franchisor’s advertising budget.
Programs targeting rapid franchise expansion may benefit from the use of LRNs in the sales process. This outsourced form of franchise lead generation provides the benefit of a variable cost structure, but with average success fees ranging of $15,000 or more, these brokers can be far more expensive than internal lead generation.
Brokers offer some notable advantages. While some brokers will take fees to accept a franchisor into their network, most are paid only once a franchise is sold, providing some comfort in the pay-for-performance nature of the relationship. Moreover, franchisors don't have to pay these fees until after they've received the franchise fee, which provides some cash flow advantages.
Additionally, each broker lead will come to the franchisor prequalified. These prospects take much less time and effort in the franchise sales process and close at a much higher rate than virtually any other type of lead. Franchisors who work closely with brokers can also use them to obtain feedback from the prospect and guide them more effectively through the sales process.
That said, brokers aren't without their disadvantages. Although brokers aren't directly controlled by the franchisor, they can make representations that may subsequently expose the franchisor to liability, claims of fraud, or franchisee dissatisfaction. Prudent franchisors will make it their responsibility to monitor how the brokerage network is representing them, provide the brokers with ongoing training and feedback, and ensure that potential franchisees are fully informed about the franchise from the franchisor’s perspective.
Brokerage networks aren't a magic pill for lead generation. They take work. Franchisors who rely heavily on brokers will often spend money to attend or sponsor conventions for each brokerage network and develop formal communications plans to keep their concepts “top of mind” within their broker networks.
And brokers can't substitute for an internal sales force. Once the lead is generated, the franchisor remains responsible for the franchise sales process. In most cases, that means paying a sales commission to the franchise salesperson over and above the brokerage fees generated by that sale.
Finally, being represented by a broker (or several, as they generally don't require exclusivity) isn't a guarantee of franchise sales success -- or even of increased lead flow. Sometimes, as the new franchisor on the block, you may find yourself with little brokerage action despite major expenses. Brokers want to send leads to franchisors that will close deals (or that pay higher commission rates), so getting on an individual broker’s short list may be more difficult -- especially for newer franchisors.
In deciding whether to use brokers, factors to be considered include the aggressiveness of your franchise sales goals, the size of your marketing budget, the desired geographic coverage, and your willingness to monitor the brokerage network closely. Select your brokerage networks with the same care you'd use in selecting an in-house franchise sales force.
While brokers can be a tremendous boon, driving high levels of franchise sales for some franchisors, they're not right for everyone. They should be viewed as a means of supplementing franchise sales leads, not as the exclusive mechanism for generating those leads.