How Franchise Brokers Can Grow (or Destroy) Your Nest Egg

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How Franchise Brokers Can Grow (or Destroy) Your Nest Egg
Image credit: Illustration by Markek Haiduk
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This story appears in the April 2017 issue of Entrepreneur. Subscribe »

Lisa Tubbs spent 20 years in the corporate world as a successful project manager, then finally succumbed to the itch to run her own business. She wanted to follow in the footsteps of her father, a commercial fisherman, and her grandfather, a plumber. So in 2016, she took a buyout at her job and then met with a career transition adviser to explore her options. His verdict was that she had an entrepreneurial spirit but maybe not the confidence to go it alone. Franchising was just the thing for her.

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Which franchise should she buy? Tubbs was eager to find the answer. She read up on the industry and visited the International Franchise Expo in New York City. But like many potential franchisees, she was overwhelmed by the sheer number of brands and their jargon-heavy pitches. So she asked her career adviser for help, and he told her to contact a franchise broker.

It was a decision that could have made her career -- or ruined it.

Franchise brokers are a relatively new entity in the world of franchising. They’re a form of middlemen: They help a potential franchisee narrow down their choices to a few brands that fit their particular skill set and budget, and then look into the finances and track records of those brands to make sure they’re worth considering as an investment. In exchange for connecting a franchise with a new buyer, the broker scores a commission from the franchisor.

It sounds helpful in theory, and it can be. But in the past 15 years, the number of franchise brokers has exploded -- going from a small handful to an estimated 1,500 in the United States. That’s been fueled by an uptick in franchising more broadly: There are now 3,473 franchise brands in the country, with at least 300 new ones launching each year, and they offer varying levels of information, disinformation and hype. And as competition for new franchisees has risen, so have the commissions some franchises are willing to pay. In 2007, a broker might have gotten $10,000 a sale. Now that’s double.

Business like this is bound to attract a mix of reputable insiders and disreputable opportunists, and the industry hasn’t totally managed to separate the two. There are no licenses or certifications required to become a franchise broker. Literally anyone can work as one, whether or not they’ve ever heard of an FDD (franchise disclosure document, the legally required prospectus given to all potential franchisees). And because brokers are paid based on commission, they’re incentivized to push clients toward the franchisors who are willing to pay the most -- and not, say, the ones that might be the most suitable for a future franchisee.

“They use these assessment tools that are usually meaningless,” says outspoken broker critic Michael Seid, a 30-year franchising veteran, founder of the consultancy MSA Worldwide and author of Franchising for Dummies. “If the best franchise for you is a hairdresser, and they don’t have a financial relationship with a hairdresser, then they might suggest a pet store. What’s good for the broker and the franchisor may not be that good for the potential franchisee.”

Related: Why You Should Buy a Franchise Instead of Starting Your Own

Tubbs knew none of that when she called her franchise broker. But anyone who follows her path should at least know this: There are ways to tell a good broker from a bad one, but you need to do your homework.

The bad stories often start the same. Someone is thinking about buying a franchise and googles around for an opportunity they like. The search quickly becomes overwhelming. Then they end up on one of dozens of what are called informational franchise “portals” -- essentially online directories of brands with their boilerplate descriptions and cost breakdowns listed, which promise to help potential franchisees explore their options. Just fill out this form, the portal page says and someone will get back to you. The site is really what industry types call a lead generator, grabbing names and phone numbers and then selling them to franchisors and brokers for about $25 to $35 a pop.

The brokers call these franchise newbies, offering their brokerage service for free. 

That’s roughly how Laurel, Md., resident Andrew Weiss first connected with a broker. He’d been looking online for franchise opportunities and came across an epoxy-floor-covering company called Red Rhino. Weiss filled out a form on a website and asked for more information. Shortly after, he was contacted by Christopher Conner, president of a franchise brokerage called Franchise Marketing Systems. So far, pretty standard stuff. But then things took a turn.

Conner was a broker. But in this case, he was actually working directly for Red Rhino -- and clearly was trying to sign up new franchisees at any cost. Conner fed Weiss fraudulent information, failed to give him that very necessary FDD form and didn’t disclose that Red Rhino wasn’t actually registered to legally offer franchises in Maryland. In fact, one of the only documents Weiss received from Conner was a worksheet saying he could make 137 percent of his investment in the first year and 983 percent of his investment by year five. Weiss signed on, but he sued when those profits didn’t pan out. (These details are from a Maryland Securities Commissioner lawsuit against Red Rhino, which it won. Conner and Red Rhino are barred from operating in the state. Weiss settled his case against them but, as part of that settlement, cannot talk about it.)

Weiss’ situation is unusual in the degree of outright fraud it entailed. Still, brokers are involved in plenty of other questionable scenarios, according to franchisee attorney Mario Herman, who has represented clients in other lawsuits indirectly involving Conner. Many disputes go unresolved; brokers who make promises or fraudulent claims usually do so over the phone, and they typically have their clients sign an agreement making any oral communication nonbinding. That means that when things go wrong, franchise brokers are legally protected (unless there’s a paper trail like the one Weiss had). And if a franchisee buys a sandwich shop that ultimately fails, it’s difficult to prove the franchise broker is at fault. Maybe the owners were just bad at business.

“There aren’t a lot of checks and balances on these guys,” says Herman. “A lot of them are just in it for the money and don’t care about the long-term success of the franchisee. There’s an old saying about some franchise sales: If you can fog a mirror, you can buy a franchise.”

Lisa tubbs was lucky. She hadn’t stumbled onto a broker on her own; her career adviser had given her a particular one to call. It was Jack Armstrong, a franchise broker in northern New Jersey for FranNet, a well-respected firm. After many conversations, Armstrong steered her toward a few brands that fit her personality and skill level. She eventually signed on with The Cleaning Authority, a tech-driven residential cleaning franchise, and opened her Parsippany, N.J., location in November 2016.

Related: Smart Tips for Growing Your Franchise

“Without meeting Jack, I’m not so sure I would have wound up owning a franchise, truthfully,” she says. “I would have perceived it as too complicated and requiring skill sets I didn’t possess.”

But Tubbs’ route isn’t the only successful one. Franchise experts say there are many other ways a prospective franchisee can find a good broker -- or at least, someone just as helpful as a broker.

The simplest route is to find one who is certified by the Franchise Brokers Association. Former broker Sabrina Wall founded the organization in 2008, after working for a brokerage with unprofessional practices. She heard many franchisors complain about her colleagues in the field, and was motivated to try to help codify best broker practices and offer training, regulation and certification. “I think for a long time the way the industry worked was dysfunctional, and it rewarded people for just getting leads and throwing them at the franchisor -- and whatever stuck, stuck,” says Wall. “Getting bad matches doesn’t help the franchisor, it doesn’t help the client who is investing their life savings and it doesn’t help the broker whose reputation gets tarnished. We want to lay the foundation of what it really means to help people.”

Today, Wall says her organization has about 76 certified brokers (which, according to IBISWorld, is less than 5 percent of the estimated 1,500 franchise brokers in the U.S.). Wall hopes more will become trained in franchise law and compliance with Federal Trade Commission regulations. “It’s shocking how many companies don’t teach their brokers those laws,” says Wall. “We’ve taken the approach of policing our own backyard.” 

Another option is to avoid brokers and hire a franchise adviser instead. This person does roughly the same job -- helps someone find a good fit, and then helps them navigate all the paperwork and financial questions -- but is paid by the hour by the potential franchisee, not with a commission from the franchise itself. That way, the adviser doesn’t have the kind of conflict of interest some brokers or consultants do.

One such person is former franchise broker Joel Libava, who, in 2010, was so concerned about his industry that he decided to get out of that game. Now he’s able to offer franchisees unbiased advice. “I don’t care what people buy, as long as I help them find something that is right for them. It’s a lot cleaner, but there aren’t too many people around doing this,” says Libava, who is based in Cleveland. “Things are going to stay the way they are because brokers have a $20,000 check staring them in the face instead of a couple hundred bucks. Unless they have a passion to help others, most people will become brokers instead of advisers.”

Working with a consultant can give potential franchisees a broader pool of options, too. Not all franchisors can afford to pay brokers large sums, which means brokers will rarely recommend them. “For a small brand just starting out and selling 10 franchises per year, those commissions add up to a big chunk of their budget,” says Scott Mortier, president of The Franchise Whales, an incubator that helps smaller franchise brands expand. He works with upstart clients such as Dental Fix Rx and GyroVille, and actively discourages them from working with brokers. “They need [their money] to market and develop their franchise, not to pay broker commissions.”

Of course, a potential franchisee can avoid brokers and consultants entirely -- and do the legwork of finding a franchise on their own. “If someone is unable or unwilling to put the shoe leather down and pick up one of the 100 books out there about franchising, then God bless them. I would choose to be more protective of my own assets than letting someone else, like a broker, select a franchise for me,” says Michael Seid, the 30-year franchising vet. He suggests potential franchisees read books, devote many hours to research and meetings and hire someone to help them understand all of franchising’s financial and legal requirements. “The simple fact is that if you’re willing to spend $50,000 or $100,000, your entire life savings, on a franchise, how do you not spend $5,000 to sit down with a great lawyer?” 

Related: 5 Tips for Finding the Perfect Franchise

Some people don’t have the time for all that -- and even if they did, they may have trouble sorting out everything. That’s how Tubbs felt. She put in the effort but still needed help. Her broker helped it all make sense, she says, and she doesn’t feel led astray. But of course, time will tell how well her cleaning business does. “Once I made this decision to pursue a franchise, that’s been my focus,” she says. “I’ve never looked back and wished I’d taken a different step along this process.” 

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