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Bibby: I’m Nick Bibby, franchise consultant and principal of the Bibby Group. Today, we’re fortunate to have Warren Lewis, today he’s representing and always represents so most of us represents the franchisor side; Julie Lusthaus who is out in New York and represents franchisees; and of course, Bruce Schaeffer, tax attorney and owner-principal of Franchise Valuations. So we have covered about the entire spectrum of franchising. Brokers have been around forever in franchising but today their numbers are astronomical and first before I go any further, tell us what the new policy is with regard to disclosure with brokerage information?

Schaeffer: Well under the original franchise rule, brokers were required to be disclosed in the offering circular. So if a company, for example, was using a large network of brokers, there might be an attachment in the disclosure that would have 300 names, addresses, and telephone numbers.

Bibby: It was onerous.

Schaeffer: But protection…potential brokers and of course, that information changes so frequently. It was very hard for franchisors to even keep it current. So as a result, the FTC looked at that situation and what they’ve come down to is they no longer require you to include brokers in Item 2 of the disclosure document so you don’t have to have a long list of brokers. What they have replaced that with and it’s a combination of state and federal regulation, on a cover page, they talk about what a broker is in the disclosure document and they say a broker works for franchisor and a broker may be compensated by the franchisor. So you need to do your own investigation. So that’s a new disclosure.

Bibby: FTC is getting away from our urging people not to look at broker as consultant, is that true or not true?

Schaeffer: The FTC says they are franchise sellers.

Bibby: Yes.

Schaeffer: And a franchise seller can be anyone who’s employed by a franchisor or a third party broker can be a franchise seller or anyone involved in helping the franchisee or prospective franchisee to decide whether they want to go into franchising. So they have clarified that a person who sits down with the prospect and says, “Based on your personality, there are ten franchises that I think you would like and let me contact or help you to contact two of those?” That is a franchise seller, that is a broker. And so that has been clarified.

Bibby: Yes.

Schaeffer: So that was an issue in the past. It’s no longer an issue whether or not they’re brokers. Then the other change that the FTC made is one on the receipt page. If a broker is involved in the transaction now, you have to name that specific broker with their address and telephone number.

Bibby: But no background information as before Item 2 or 3?

Schaeffer: No background information. No background information but there’s a record there as to who talked to them so that if anything goes wrong later, you have a record of exactly who talked to them.

Lewis: Many brokers in the franchise industry are people who’ve been barred as brokers from the securities industry. There is no licensure of brokers in the franchise industry so you may very well be getting a bad apple from a previous life coming to project and give you this display of sincerity and honesty that has previously gotten them in trouble because it was disingenuous and they may be doing the same thing in this context. So it’s a real caveat emptor situation where prospective buyers should exercise great care in believing what’s told to them by brokers.

Bibby: What we’re talking about in terms of brokerage to me is what puts transparency in reverse and as I said, we’ve always had brokers around. Now we have the franchising of franchise brokerage. You have people who have no more than a month in the industry but they’re advising someone as new as them in terms of what they should buy and that’s my problem especially when they’re self-titled Franchise Consultant which they are not. They’re franchise brokers seeking a commission.

Lusthaus: I would tell prospective franchisees to be aware of any aggressive tactics whether it’s coming from a broker or a franchise or employee because anybody who’s telling you, “Oh you better hurry up and sign the agreement. I have somebody else who’s very interested in the territory,” or “There’s no point in talking to a lawyer because they’re not going to negotiate the agreement anyway. Just sign it. Go ahead.” They should be wary of that. On the other hand, certainly if you know the industry or the segment that you want to find a franchise in and you’re looking for a very particular type of business, I think that brokers can be helpful because they may have…they’ll have an idea of different organizations that are out there or may be out there.

Lewis: As source of information.

Lusthaus: Yes but I think that you should be very careful about what any salesman tells you.

Lewis: As long as you know they’re a broker, you need to know that they’re representing the franchisor. I mean, you just should not think that they’re representing you. And I think if you do understand that, hopefully, you will discount what they say or you’ll be careful in evaluating what they’ll say. There are reputable brokers.

Bibby: Do you agree?

Lewis: There are systems of brokers in the country.

Schaeffer: Agreed.

Lewis: Choices of system for your net that are well known. They train their people but of course, you have a lot of people out there so there’s going to be a wide range of quality in terms how to help people. The other thing is there are so many franchises that maybe that that choice is causing the need for brokers because if you have 3500 choices, how do you as a prospect know where to start? So one thing you might be able to talk to a broker, they might do, I know some of them do personality tests, interest tests and that might be a useful way for you to get a better feel for whether you should be a franchisee or what areas you might want to go into.

Schaeffer: My concern always is that if a broker is the entry point to franchising for a buyer, then there’s an unsaid relationship that’s established because I’m your partner in investigating. That’s my only concern and it could go beyond…I’m going to look past the fact that you could be earning a commission and I’m not paying you. You’re still my friend in franchising.

Lusthaus: Exactly. Exactly, be careful of that, the source of the information.

Bibby: And I think many brokers do try to take that approach. I think they honestly try to help people make the right decision.