Should You Use Franchise Brokers?
Franchise brokers can help you find qualified franchisees. But is hiring a broker the right choice for your franchise?
When it comes to franchise lead generation, few methods are as effective--or as controversial--as the use of franchise brokers. Used sparingly by franchisors less than a decade ago, franchise brokerage networks are today used by nearly half of all active franchisors and, by some estimates, account for as much as 10 percent of franchise sales.
So what has accounted for this dramatic rise in the use of franchise brokers? How do they work? And are brokerage firms right for your franchise organization?
The Internet Information Glut
What has accounted for this dramatic rise in brokerage activity within franchising? In a word: the internet.
A decade ago, at the dawn of the modern internet, franchise buyers had limited access to information about the franchise universe. Prospective buyers had to do their research by looking through franchise directories, magazines and newspapers, and perhaps going to franchise or industry trade shows. But even the most daunting trade shows would have perhaps 200 franchisors to choose from, and most magazines would have fewer still. And while directories might have over 1,000 franchisors listed, the availability of information about these franchisors was severely limited.
Enter the internet. Today, there are nearly 3,000 active franchisors listed on the internet. Google "franchise opportunities," and you'll find a staggering 5 million pages that have been indexed. If prospective franchise buyers wanted to spend a minute looking at each of these pages, and they clicked away 24 hours a day, 365 days a year, it would take them nearly 10 years to do so.
Clearly, this information overload has made it impossible for many people to effectively sort through the choices in the franchise universe--paving the way at the franchise buyer level for a trusted intermediary who will help them through the morass.
At the same time, franchisors are finding it more and more difficult--and expensive--to obtain qualified leads. Increasingly, the internet is commanding the lion's share of their franchise marketing budgets, as franchise buyers turn to the internet first when doing their research. And since 90 percent of internet searches will extend only three pages deep, franchisors cannot rely on organic search optimization alone to get their message to the franchise buying public.
But the proliferation of franchise advertising portals--last count we had identified more than 70 of them--combined with increases in the costs of pay-per-click advertising (as prices continue to be bid up) have made it very expensive for new franchisors to advertise effectively across the internet.
Brokers, however, who may represent a hundred or more franchisors, have a real advantage when it comes to lead generation. While the typical franchisor has only one thing to sell to a franchise prospect, the broker has a virtual warehouse of opportunities. And by allocating their advertising costs across that warehouse, they can generate leads much more cost effectively.
This convergence of advertising economies and franchise buyer confusion has created the conditions responsible for the explosive growth of 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.
Are Brokers Right for You?
From a franchisor's perspective, brokers offer some significant advantages. Perhaps at the top of the list is the variable-cost nature of the brokerage process. Since franchisors don't pay until they make a franchise sale, they can receive comfort in the pay-for-performance nature of the relationship. Moreover, unlike traditional advertising, they don't have to pay these fees until after they have generated the franchise fee that allows them to pay.
Additionally, the franchisor receives a significant benefit in that each broker lead comes to them prequalified. These prospects take significantly less time and effort in the franchise sales process. And, given the combination of the "third party endorsement" provided by a broker and the prequalification that has been done, broker leads close at a significantly higher close rate than virtually any other type of lead. Franchisors who work closely with brokers continue to work with them throughout the sales process--using them to obtain feedback from the prospect and to guide them more effectively through the sales process.
That said, brokers are not without their disadvantages.
First and foremost on the list of disadvantages is the fact that brokers aren't directly controlled by the franchisor. But at the same time, they can make representations that may subsequently expose the franchisor to liability, claims of fraud or potential franchisee ill will. With this in mind, the prudent franchisor makes it their responsibility to monitor how the brokerage network is representing them, provide the broker network with ongoing training and feedback and ensure that their franchisees are fully informed about the franchise from the franchisor's perspective.
Brokerage networks don't provide a magic pill for lead generation. They take work. Franchisors who rely heavily on brokers often attend or sponsor conventions for each brokerage network and develop formal communications plans to keep their concepts "top of mind" within their broker networks.
While brokerage leads do require more work, brokerage fees are significantly more expensive--averaging 1.5 to 2 times more than an internally generated lead.
And, of course, brokers don't substitute for an internal sales force. Once the lead is generated, the franchisor remains responsible for the franchise sales process. And 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--they generally don't require exclusivity) is not 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 and perhaps some significant expenses to show for it.
The bottom line: Brokerage firms can be a tremendous boon for some franchisors, but that they should be viewed as a means of supplementing franchise sales activity, not as the exclusive mechanism for generating franchise leads.
In making a decision on the use of brokers, the factors that should enter into your decision-making process should include the aggressiveness of your franchise sales goals, the size of your marketing budget, desired geographic coverage and your willingness to monitor the brokerage network with care. As with most business decisions, there isn't one right answer. While brokers can drive huge levels of franchise sales for some organizations, they aren't right for everyone.
If brokers are a good fit for your franchise, select your brokerage network (or networks) with the same care that you would use in selecting your franchise sales force. Do so, and you may be well rewarded. Fail to do so, and you do it at your own peril.
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