One of the most hotly debated and discussed questions among franchise system owners and operators is whether to engage outside franchise sales agents, brokers, franchise sales outsource companies (FSOs), or all of the above, when attempting to grow a start-up or emerging franchise system. I joined Michael Valente of Renovation Sells, Don Powers of Fitness Machine Technicians, Frank Closurdo of SMB Franchise Advisors and Alesia Visconti, CEO and President of FranServe to hear what they had to say about using brokers and FSOs at the annual SMB Franchise Summit this past holiday season. Here are my top five takeaways:
- Consider Finding Your First Five on Your Own. Many consultants and advisors will recommend the use of outside brokers and sales agents immediately upon launch. However, some of the panelist recommend methodically and carefully finding your first five franchisees on your own and then evaluating the use of a third-party sales assistance when searching for your next 5-50 franchisees. Why? A new franchise system needs to ensure it has sufficient internal operations and training staff before it rapidly expands. Signing large numbers of franchisees before a system has an opportunity to ensure it has the personnel to support the units is a recipe for disaster.
- “You are Dating. I am Marrying.” Make sure that you are engaging outside representatives that are committed to finding the right prospects for your particular system. As the panel said, the broker is dating, but the franchisor is marrying. Signing a franchisee is a commitment and you should have partners who are willing to go the extra mile to find franchisees that have the best chance of long-term success.
- “The first 10 will validate the next 100.” Your first franchisees will most naturally become your goodwill ambassadors and best advocates, marketers, promoters, and examples of the brand’s success. It is absolutely imperative that these initial franchisees are up to the task.
- Be Choiceful. This is one area where the panelists diverged in recommendations. A franchise system’s “washout (failure) rate” is typically always around 15% – plus or minus. At least one of the speakers recommended just “taking what you can get” knowing that there will always be franchisees that fail for one reason or another. This differing in views is why it is important for new franchise systems to speak with a wide variety of advisors to get a range of input and advice.
- Conduct a Cost Benefit Analysis. The typical compensation structure requires a franchisor to pay a success fee of up to 50% of the initial fee to a broker or sales agent for each franchise sold. An emerging franchise system should be sure it can afford to turn over half the income from initial sales to the agents brokering the sales. Despite the hefty success fee, for many systems, the cost structure is preferrable to hiring salaried in-house personnel. If a franchise system has low barriers to opening (for example, service based mobile or home based systems without regulatory or legal permitting hurdles), then this fee structure may not be problematic. However, for systems with a long lead time to opening (for example, brick and mortar child care system which require extensive build-outs, permitting and training), then this may become an issue. This is particularly important in franchise registration states imposing a financial assurance requirement, such as the escrow or deferral of collection of the franchise fee until opening. A franchise system will want to be sure any agreement with its brokers does not requirement payment of the fee before it actually receives the money.
This year’s SMB Franchise Summit provided a great deal of advice regarding the use of franchise brokers and agents. New franchise systems should take the time to discuss the pros and cons with their trusted advisors before deciding to sign an engagement agreement with a FSO or broker. Finally, have your franchise attorney review any agreement with a broker before signing. The standard forms are often drafted in favor of the broker and the parties want to be clear about important issues such as termination rights, commissions, and performance obligations.