Broker Challenges, and How To Sign Up, Part 2 of 4

By: Steve Olson
Published: March 9th, 2011

In last month's Franchise Update Sales Report, I provided an introduction to working with brokers to increase your franchise sales, and highlighted some of the advantages of using brokers as part of your development strategy. This month I examine some of the risks and downsides, as well as how sign up with a broker that works for you.

1. Challenges of working with a broker

• Rising costs-- $15,000 is the median commission brokers receive for franchisee placements, according to the 2011 Annual Franchise Development Report from Franchise Update Media Group. This is a generally acceptable budget expense that works for the majority of franchisors who understand and enjoy the rewards of using brokers. Unfortunately, commission payouts are soaring, with a few aggressive franchisors now "buying" broker business by paying up to $25,000 and sometimes more for single-unit sales. And in isolated cases, a few pay the broker a portion of the ongoing royalty stream.
  
  The bad news here is that these financial incentives can 1) create an uneven playing field with some commissioned consultants when choosing which concepts to present to their client buyers, and 2) strain franchisor acquisition costs beyond prudent business practices. It certainly can become unaffordable for retail concepts with real estate assistance and startup costs... added expenses that service businesses don't experience. An additional cost: franchisors should attend their brokers' conferences, which do pay off in additional sales but can require travel expenses and registration fees up to $5,000 and more.
• Co-dependency-- Some franchisors have put "all their eggs in one basket," anointing consultant/broker networks with the responsibility of building their systems. This is extremely dangerous. Accordingly, consulting systems will advise you to spread your risk by using multiple lead generation sources. I've witnessed these sobering realities time and again:

1. An influential consultant is angry because you blew a sale. This may be false, but perception is reality. He kills your lead flow at their national conference advising his colleagues to think twice before showing your concept.
2. Your franchisee validation dips and your brokers instantly cut you off since your hot concept is now not so hot.
3. The prospect pipeline for the broker network dwindles and your leads shrink significantly.
4. Brokers know they're the foundation of your recruitment success, making you vulnerable to their policies, changes, and demands. Without other sales sources you are helpless.
5. You're at a disadvantage because you never recruited a franchisee from start to finish.

A mobile service franchise once sought my counsel, confiding to me, "We have to learn how to market and sell our own prospects, because we're headed for trouble if we don't. We've been extremely successful with brokers, but I don't like being prisoner to their prospect supply. I now must figure out how to effectively generate lead flow, follow-up with initial prospects, and produce applications."

• Losing control-- A few sales consultants in every broker network are what I call "sales commandos," people who try to bully, manipulate, mislead, or change your sales process to suit their battle plans. Their mercenary appetites for commissions may overpower any ethics they have for either the candidates or the franchisors they represent. Try turning down their Discovery Day candidate and you'll face a raging bull! I experienced this a few times. Fortunately, they are a minimal faction among the professional broker community, but they do need to be exposed and eliminated by their superiors for damage control. These renegades are dangerous to the franchise consultant company, the franchisor, and the prospective buyer. Broker network executives want franchisors to immediately report these wayward soldiers, who are violating their own best practices and will be punished accordingly. Unchecked, they give all of us a bad name.
• Too many unqualified candidates-- Not all brokers are equal, and unfortunately some just don't cut it as franchise recruiters. A few will waste your valuable time by sending leads that clearly don't show the money, skill sets, or characteristics you are seeking. To prevent this, clearly define your success profile to these broker "shotgunners," and return referrals that don't meet your minimum qualifications with a corresponding note. Be sure to review with the broker the candidate's shortcomings so they won't make the same mistake again. Also, beware of becoming the "throwaway franchise" some brokers use in presenting different concepts. This is a comparison practice to clearly showcase another franchise much better suited for the candidate. Brokers selfishly use this trick to finesse a sale. It's a waste of time for you and their candidate, who should only review franchises that match their criteria. Drop the broker who habitually does this and tell them why.
• Retail concepts struggle-- Lower investment, non-food franchises can do well using brokers. For higher-priced food concepts, often the relationship has not proven fruitful for either franchisor or broker. Prime real estate requirements, much longer opening times, and higher investments create barriers and consulting challenges most brokers don't want to address--especially when the commissions don't match what many service franchisors can pay. It simply isn't worth the effort for most. On the brighter side, a few hot, successful food-related concepts willing to invest the extra time have educated and won over the more sophisticated brokers, who have championed their causes. It's A Grind Coffee, Bear Rock Cafe, and Robeks Juice have generated new franchisees through consultants. As franchise broker systems evolve, hopefully they will realize the rewards of representing "Main Street America" to their clients. But not in today's world. Consequently, most higher-priced retail concepts don't consider franchise consultants a viable lead source, as revealed in the Annual Franchise Development Report.

2. How do I sign up?

Don't be shocked if you approach a broker group to represent you and they turn you down. The best consulting networks seek franchisors with hot concepts, strong validation, earning claims, and an effective selling process. They seek credible franchises that will support their buyers' efforts in building successful businesses. You must have your act together.

If you are a young franchisor, you typically need to establish a track record before the noteworthy consultants will take you on. If you are established, you may be placed on a waiting list because of a full inventory of concepts, or an abundance of franchises in your category. When you are up for consideration, a broker research analyst typically will review your FDD, promotional material, sales process, and the sales experience of your recruitment personnel. They frequently mystery shop your franchise owners to ensure good franchisee satisfaction.

Next time: 10 Tips to Bigger Broker Success.

This is an excerpt from my book, "Grow to Greatness: How to build a world-class franchise system faster." To order copies, click here.

2011 AFDR Data Driplet

View Original for Full Data Table

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