Franchising is a business unto itself. It has its own style, executive skill set, body of regulation, and even its own jargon. When you decide to franchise your operations, you are getting into a new business separate and apart from the underlying restaurant/hotel/service business, and this can be daunting. If you are new to franchising, you may have an immediate inclination to outsource the toughest part of the whole franchise program: franchise sales. Franchise sales is where the most intricate regulations comes to bear; it is a difficult market to penetrate if you are new to it; and it involves considerable expense, including the costs of advertising, Internet promotion, franchise trade shows, and the myriad other outlets available to generate franchise sales.
A Range of Options: The marketplace has generated service vendors that provide a wide range of services related to franchise sales. At one end of the range are those firms that do no more than generate sales leads. They kick up names from the Internet, don’t qualify them or screen them in any way, and pass them on to the franchisor client in wholesale batches. The franchisor then contacts the leads directly.
At the other end of the range, full-service brokers will recruit prospects and sell your franchise for you, deliver disclosure documents to prospective franchisees, receive funds from the new franchisee, and even assist the new franchisee setting up in the business.
National networks of franchise sales brokers have been growing in the marketplace, offering an impressive number of members spanning the country, working for the franchisor to match interested clients to its particular offering.
Pros: While the companies at the lower end of the range don’t offer much benefit, using franchise sales brokers has some obvious advantages. By using these services, a franchisor can all but eliminate its franchise sales staff, and drop the expenses of Internet advertising, trade show attendance, and newspaper advertising to generate franchise sales.
A franchisor can also streamline its workload by relying on the service provider to provide compliance with franchise laws by delivering disclosure. For example, one well-known supplier arranges for the electronic delivery of the franchise disclosure document (FDD), and documents its delivery and receipt.
Another plus that has come with the Amended FTC Rule adopted in 2008: Brokers no longer need to be disclosed in the FDD. Before the Rule was amended, some FDDs had to include 70 or more pages listing the business history, litigation, and bankruptcy information of extensive broker networks.
Perhaps the greatest advantage is that a franchise sales brokerage can help a young franchise program hit the ground running.
Cons: It’s expensive! Most broker organizations will require a hefty share of the initial franchise fee, and then some. Expect to pay something in the neighborhood of 40 percent of the initial fees — and in some cases, more than 60 percent — to brokers.
For newer franchisors, this is a serious expense at just the stage of development when cash flow is most needed. A common mistake made by new franchisors is that they undercapitalize for the early years of the program. This financial strain can be exacerbated by accounting rules that delay recognition of fee income until new franchisees are open for business. If you fail to take into account the loss of a sizeable portion of initial franchise fees to brokers, the financial impact of these fees can cripple your new franchise system.