By Michael Seid and Kay Ainsley, Managing Directors, MSA Worldwide
Franchise brokers are paid their commission only when you buy a franchise from one of their clients.
The simple answer is that franchise brokers are hired by franchise companies to sell you a franchise. If you are looking at franchise opportunities, sooner or later you will become acquainted with a broker network.
Using a broker will not change the amount of fees you pay. But keep in mind that brokers are paid a commission – and earn income – only when you buy a franchise from one of their clients. When you sign your franchise agreement, the broker will typically earn 40% to 50% of the franchise fee you pay to the franchisor or even more, since most brokers have a minimum fee in the range of $12,000. In some situations brokers may continue to earn a percentage of your payments to the franchisor if you invest in additional franchises later. And, in a few instances they may also earn a percentage of the continuing royalty payments you make.
Using a broker to help you invest in a franchise is considerably different than using a broker when you buy a house. When you purchase a home, the homeowner pays a commission of approximately 6% that is likely shared by the listing broker and the selling broker. The selling broker is able to access information on all of the houses in the market that are up for sale by looking at the multiple listing services; they then can bring you to each house that met your needs, regardless of whether the house was listed with their particular agency.
However, when it comes to franchise brokers, there are no multiple listing services for franchisors. In franchising, the franchise brokers can only earn money on the franchises offered by the clients they represent. Therefore, while there may be thousands of franchises available and hundreds that meet your pocketbook and interests, the broker you are working with may only have a very small percentage of the available market to show you.
While the number is growing, only a small percentage of franchisors use broker networks and even the largest broker networks only represent a relatively small number of franchise opportunities. Brokers can certainly provide you with important information on franchising and the opportunities available. However, if you work with a broker, keep in mind that they limit the pool of opportunities available to you if they are your only source of information about franchise opportunities.
Brokers often appear very knowledgeable about franchising to the novice prospective franchisee. This is one of the reasons that they are an appealing source of franchise sales for franchisors. Their recommendations can often carry considerable weight with the prospective franchisee and make the franchise sale that much easier. Also, inexperienced franchise prospects often take the broker’s recommendation as gospel and do not conduct the type of thorough due diligence on the franchise opportunity that most professionals in franchising recommend.
There are many seminars, articles and books on investing in a franchise. Other resources include the International Franchise Association (IFA) website (www.franchise.org), and A Consumer’s Guide to Buying a Franchise published by the Federal Trade Commission (www.ftc.gov). For a more in-depth understanding of how to buy a franchise, you might consider Franchising for Dummies by Michael Seid, Managing Director of MSA, and the late Dave Thomas, founder of Wendy’s.
Franchisors advertise their franchises on lead generation websites, where many different opportunities are available. Some of these sites provide information about franchising in general and also have information on franchisors that pay to advertise on the sites. Such referral sites provide a wealth of information on franchising and let you explore specific franchisors at your leisure, without having to deal with any pressure from franchise salespeople until you are ready.
Many franchise information sites are actually operated by franchise broker networks. Do include brokers in your network of information on franchise opportunities; but keep in mind that no matter how knowledgeable they appear and no matter how friendly they are and no matter how many times they refer to you as their client, they work for the franchisor. And, they only get paid if you buy a franchise from one of their clients. If they tell you that a hair care franchise is perfect for you, they may be right – but in addition to the hair care chain they introduce you to, get information on all of the other hair care franchises available. A broker’s client may indeed be the best fit for you, but you need to make that determination based upon your own research.
Do you have further questions about franchise brokers?
MSA can provide guidance on how to find the right franchise investment, or how to evaluate if selling franchises through a broker network is right for you.