If you’re an investor interested in buying your first franchise, the number of choices available can be daunting. In the United States, the number of franchise brands recognized by the International Franchise Association now surpasses 3,000. With an increasing number of franchises entering the market every year, it can be tough to fully evaluate and compare all of the opportunities available to you—not to mention the culture, earnings potential, and nuances of each. Because of the time involved, many investors are turning to franchise brokers to help them narrow the field and help them make the right decision. Here’s what you need to know about franchise brokers and how they can help throughout your franchise research journey.
A franchise broker works for a franchise broker’s network or for themselves, with a goal of matching up prospective investors with the right franchise opportunities. Their job is:
While it’s a broker’s job to get to know you and look out for your best interests, it’s important to understand that a franchise broker doesn’t represent you—he or she represents a portfolio of franchises.
Similar to a real estate broker who represents a seller and gets paid when a house is sold, a franchise broker is an agent, who represents a book of clients in a franchise investment transaction. Most franchise brokers only get paid if you invest in a franchise they represent, said Eric Stites, CEO and managing director of Franchise Business Review. Commissions paid to franchise brokers vary, but typically are paid out as a percentage of the initial franchise fee—sometimes up to 50% of an initial franchise fee that could range between $30,000 and $50,000. In other cases, franchise brokers are paid a flat rate.
With such large commissions at stake, it’s important for you to feel secure that you are working with a broker who will best represent your interests. A good place to research franchise brokers is through visiting the International Franchise Association (IFA) website, which includes a franchise broker directory.
“The reality is, it boils down to the broker – like individuals, there are good ones and bad ones. You really have to interview a couple of different brokers and get a sense of how they work and what services they provide,” Stites said. “Most importantly, ask anyone you plan on working with for references.”
Brands rely on franchise brokers to find qualified candidates to grow their businesses faster and extend into new markets. Increased competition among franchisors has resulted in the explosion of franchise brokers — all looking to attract the right candidates to help increase their clients’ reach and profitability.
While the total number of franchises has increased slightly, the number of franchise brokers outpaced it, Stites said. The reason for this is that the top 10% to 20% of brokers conduct the majority of franchise placements in a given year. Smaller brokers also compete in the market but may struggle to find good access to candidates or may lack a robust enough marketing program to place more than a few investors a year. The commission structure has created a lot of competition in the broker space, which has prompted companies to hire their own brokers and pay higher broker fees. In turn, this has driven up the average initial franchise fee cost to the investor, he said.
“A decade ago, you could get into a Subway or one of the more popular franchises with a $10,000 to $15,000 initial franchise fee. More recently, a lot of franchise companies have increased the fees because they are working with brokers and have to pay them more to stay competitive,” Stites said.
Many franchisors use brokers to sell multi-unit agreements of up to three to five units, which can result in even higher commissions, because there are fees (and therefore commission) associated with each unit, he added.
Larger, more established franchisors aren’t typically who you will find using franchise brokers. Instead, mid-level and emerging brands are using them to generate much-needed leads. You should be particularly aware of working with a franchise broker representing a brand that’s looking to establish a greater market share quickly, Stites said.
“I’ve seen companies add 50 to 100 locations in a year using brokers. Many times, they get ahead of themselves because they haven’t worked out all of the kinks in their system and that can really implode on them if they are not turning around and investing heavily in operations to help with that growth,” he said.
There are many ways in which brokers can help you find the best franchise investment that meets your personality type, expected investment level, and sector of interest.
Some brokers may use personality profiles that help them to get a sense of who you are and what motivates you, while others get that same information through in-depth phone calls with you. A franchise broker who understands your goals is more apt to match you with the best opportunities, Stites said.
“That is where a good broker can provide an individual valuable service. If they know what your skill sets are, as well as your strengths and weaknesses, they can direct you to a number of opportunities that are a better fit than others,” he said.
Good franchise brokers should also help you wade through the waters of “Franchise 101,” Stites said, and be willing to hold your hand through what can be an intense research process.
This could include walking you through Franchise Disclosure Document (FDD), a document every franchise uses to disclose 23 key pieces of information to its franchisee candidates, including starting costs, the brand’s financial health, and what you can expect to receive as a franchise owner.
It also would include a thorough review of the Franchise Agreement (FA), which outlines the terms and conditions you would adhere to as a franchisee, as well as the obligations of both the franchisee and franchisor.
“There are so many opportunities out there and FDDs are huge, detailed documents. It would be impossible to know the ins and outs of all of the FDDS and FAs for hundreds of different companies. A good broker will know the basics of the FDD and be able to point out the differences between companies, what to look for, and important pieces to look at,” he said.
Larger broker networks, like FranNet and FranChoice, represent hundreds of franchise companies, which can be an advantage if you really want to widen your search and ensure that brokers aren’t leading you to particular opportunities because they hope to collect higher commissions. Larger broker networks generally pay their brokers fixed fees, so their agents aren’t influenced by differences in commission, Stites said.
Franchise brokers can introduce you to brands you may not have considered. You might be exposed not only to particular companies, but sectors you may not have ever thought you’d be interested in. Many people think they want to run a restaurant, for example, but then realize other sectors—like fitness, in-home care, or education— might be more suited to their personal and business interests, Stites said.
This is an advantage, particularly if you aren’t sure which direction you want to go in or are looking for a variety of options to narrow.
A disadvantage might include working with a franchise broker who only points you to emerging brands that may not yet have proven their business models, Stites said. “It’s common in franchising for brands to look at leaders in a sector, copy their business model, and say they do the same things – but they might not do them better,” he said.
Franchise brokers can help speed up the franchise research process.
It could take you weeks or months to research various brands and sectors, whereas a franchise broker can help you quickly target the types of franchises that meet your investment threshold and appeal to your personal interests.
Another consideration is that not all franchises are available in all locations. While you may have your heart set on opening a brand in your town, that territory may not exist. A franchise broker can quickly let you know what territories are available for any given franchise and save you a lot of time before you become too invested in one or two brands.
With any business decision, you need to carefully conduct your own research, no matter what value a franchise broker may bring to your search process. Stites recommends working with a franchise lawyer and talking to as many current franchisees as possible before setting your heart on one particular franchise.
While franchise brokers can’t officially “pre-qualify” you to invest in a particular franchise, they often have a good idea of whether or not you will be a good cultural fit for a given brand. Still, potential candidates do need to understand that the decision is ultimately up to the franchisor.
“It doesn’t happen a lot, but a broker can bring a candidate into a franchise company and they attend Discovery Day and for whatever reason, the franchisor decides the candidate is not a good fit for the system,” Stites said.
If you aren’t happy with any of the brokers you’ve met, you can still pursue franchise opportunities on your own and continue to conduct your own research, armed with more knowledge.
Because franchise brokers get paid if you sign with one of the franchises they represent, you may want to consider looking at additional ways to research and compare franchise opportunities on your own to validate the information your broker is giving you.
Franchise Business Review is a third-party market research company with a goal of helping potential candidates understand brands from the franchisees’ point of view. The resources on the FBR website are free and include employee satisfaction surveys, Top 10 lists, and other critical data that can help you make the best decision, Stites said, adding that FBR does not get paid if candidates sign with any franchise.
“We don’t survey just a handful of franchises, we survey the entire system. If you are looking at one of our more popular, low-cost lists, it could open your eyes to companies you’ve never heard of,” he said.
Third-party lists and rankings, like FBR’s, can help you confirm research you’ve already done on your own or give you a better understanding of how a franchise’s business model works. One of the most critical factors to success is understanding what most successful business owners do on a day-to-day basis, Stites said. Still, franchise brokers and third-party resources should not take the place of doing due diligence on your own.
“Our top lists, reviews and company ratings, help give you an overall picture. If a franchise has a good rating, I’d urge candidates to go out and talk to franchisees new in the business and those who’ve been in business for awhile to get different perspectives. Newer people will have a better sense of what initial training and support is like, because they’ve done it most recently. In many mature franchises, most franchisees are very happy when they first buy, but two to three years in, they are in the thick of it and feel that maybe the business doesn’t work the way the franchisor said it would or the support is not what they said it would be,” he said.
The greatest value to joining a large franchise network is your access to the knowledge base that comprises that network. Stites said that understanding the franchise community and culture is vital. For example, attending conventions can give you a feel of whether or not you feel comfortable joining an organization in which only 5% of the franchisees are women, for example. They can also give you a sense of whether or not franchisees work and socialize together or head back to their hotel rooms after a business meeting.
“When you ultimately launch a new franchise business, if you have a marketing or operations issue, you can call upon hundreds of others of people who are doing the same thing you are doing and pick their brains,” Stites said. “This is the piece that lots of people miss – they think they are buying a brand—and yes that’s important—but the franchisee network is really important as well.”