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Use a Franchise Broker

The risks of using an online broker may outweigh the supposed benefits.

Opinions expressed by Entrepreneur contributors are their own.

Q: I contacted a franchisor through information I got off its listing on a Web site and was surprised to find out that the person who returned my call was not the franchisor, but a sales broker. The broker seemed very knowledgeable and said he wanted to work with me to buy a franchise. Do most franchisors use sales brokers? Should I continue to work with the broker, or should I contact the franchisor directly?

A: The Web has increased the opportunity for people to find out about franchising. Franchisors have published Web sites that contain details about their company's products and services, information about their franchise opportunities and existing locations, applications to apply to purchase franchises and e-mail addresses for you to communicate directly with franchisors.

Referral sites, on the other hand, are the modern version of newspaper and magazine advertising. Franchisors pay to advertise on those sites, enabling customers to learn more about them than they could in a print ad and at a lower cost. Referral sites provide a wealth of information on franchising and let you explore specific franchisors at your leisure, without having to deal with any franchise salespeople until you're ready.

While they may appear to be the same, however, not all third-party franchise information sites are referral sites. Many are operated by franchise brokers. For new franchisees, the difference can be critical.

The primary source of income for referral sites is advertising revenue from the franchisor. But franchisors typically don't pay for listings on broker sites. Instead, the primary source of revenue for broker sites is the commission they receive when they sell you a franchise. Until brokers can convince you to purchase a franchise from one of their clients, they don't earn any money.

For brokers, your signing on the dotted line of the franchise agreement can mean a sizable fee based on a percentage of the upfront cost and often the continuing royalty payments you make to their franchisor clients.

Using a franchise broker isn't the same as using a broker when you buy your home. Most experienced homebuyers know the real estate broker works for the home seller. The difference between selling a franchise and selling a home is there's no multiple listing service for franchisors. In a multiple listing for houses, most if not all houses available in the neighborhood are listed. Except for the few houses that aren't listed or are being sold privately, the home buyer gets the opportunity to learn about every house in the market they can afford or that meets their needs. Franchise brokers, on the other hand, only offer their clients' franchises. Therefore, while thousands of franchises are available and hundreds of those may fit your pocketbook and your interests, the broker only shows you a very small percentage of them.

Considering few franchisors use a broker, most brokers represent a fraction of available opportunities. And different brokers have different clients, further limiting your options, even if you use multiple brokers in your search.

Telling the Good From the Bad

The major advantage of a referral site is the principal disadvantage of a broker site: pressure to buy. Recently, I sat in a seminar conducted by an outside sales agent who stressed the emotional aspect of buying a franchise and how the sales process can be manipulated to ensure that the prospective franchisee makes a speedy decision. This is not an uncommon aspect of all franchise sales, even in those conducted internally by franchisors. However, it's unnecessary for you to get into that sales cycle until you're ready and have explored all the opportunities available to you. Remember, the franchise salesperson has been through this process many times before and is experienced in closing the deal. This is likely to be the first and only time you buy a franchise. You need to come to the table armed with information.

Many prospective franchisees take brokers' recommendations as gospel, deferring to the brokers' experience. Don't let this be you. Conduct the type of thorough research that most franchising professionals recommend.

For the sake of fairness, franchise brokers who are reputable don't pressure you to buy a franchise when you're not ready or when the franchisor you're interested in isn't right for you. Unfortunately, determining whether particular brokers are reputable can be difficult. Therefore, the only way to know whom you're dealing with is to work with franchisors and not their sales agents.

How can you tell the difference between a referral site and a broker site? It's really easy-ask. When you're contacted about your interest in a franchise, ask the salesperson whom he or she works for and whether that's in the capacity of a broker.

When you receive a copy of the franchisor's Uniform Franchise Offering Circular, take a look at Item 2. The government agencies that regulate franchising require franchisors to disclose to prospective franchisees whether the franchisor is using a broker.

If you're asked to provide personal financial and other information online, look at the company's privacy statement and determine who's going to see your information. If it's a franchisor, the likely recipient is only the franchisor. If it's a broker, he may be sharing your information with all his clients-many of whom you may have no interest in. Be careful, because many of the applications online ask for very detailed information and you need to know who has access to your data and how they'll use it.

Unless you're in a hurry and like to take unnecessary risks with something as important as investing in a franchise, there really is no reason to work with a broker. Purchasing a franchise, while a successful way for many people to go into business for themselves, is risky enough. Don't increase your risk of missing the right opportunity simply because it isn't on a broker's client list.

Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the bookFranchising for Dummiesand a former member of the International Franchise Association's Board of Directors and Executive Committee. Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.