Going for Brokers? What Role Should Third Parties Play In Franchise Development?
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Going for Brokers? What Role Should Third Parties Play In Franchise Development?

Going for Brokers? What Role Should Third Parties Play In Franchise Development?

Editor’s note: The cost-benefit of using franchise brokers and franchise sales organizations (FSOs) is a complex, sometimes controversial, issue and raises a number of critical questions for franchise development executives. This is the beginning of an ongoing effort to lay out strategies from the perspectives of franchisors, brokers, and FSOs. Look for more coverage in our monthly Franchise Leadership & Development Report newsletter and at the Franchise Leadership & Development Conference this October in Atlanta.

Franchise recruitment is expensive, time-consuming, and more competitive than ever as franchisors look to grow their footprints and boost profits with successful franchisees. It’s a complex path to growth that has franchise brands increasingly turning outward to a lead strategy that relies on brokers.

And for good reason. For franchise recruitment, brokers are the top paid lead source, according to FranConnect’s Franchise Sales Index Report, which notes that broker leads are more than five times more likely to result in a sale than all other paid sources.

While the advantages of using franchise brokers in development are plenty, franchisors must balance the benefit of generating those leads with the price of success. The cost for their services ranges wildly—from “$1,000 to $100,000 annually,” says Tom Wood, president and CEO of Floor Coverings International (FCI), of the costs associated with using franchise lead referral organizations. “Yes,” he adds, “we now pay a $100,000 fee to a broker network for a premium placement.”

Why use franchise brokers?

Franchising’s continued rise comes even as economic factors—high inflation, labor and supply chain woes, legislative uncertainty, and geopolitical turmoil—are heightening the competition for high-quality franchise candidates. The overall number of franchise establishments is expected to increase by almost 15,000 to 805,000 units in 2023 in the U.S. alone, according to the IFA’s 2023 Franchising Economic Outlook report.

Lead and deal volume overall declined by 37% and 39%, respectively, in 2022 compared with 2021, according to FranConnect’s 2022 Sales Index. This “prospect supply chain shortage” will likely drive up the already high cost of lead acquisition, particularly for emerging brands that may be giving up a healthy chunk of their one-time, nonrecurring franchise fees to brokers and franchise FSOs.

In the race to find and recruit qualified franchise partners, a valuable broker (aka consultant, advisor, matchmake, or coaches) can help provide the speed franchisors need to close on a promising lead with a pre-qualified prospect. “We like to say they are already on the 50-yard line when they come to us,” says Wood. “The time frame is cut nearly in half.”

FCI’s franchise development team works with more than 700 brokers to support their quest to rapidly expand the mobile showroom business model. “In our case, they introduce candidates to our brand who may have never thought about the flooring industry,” Wood says. “They also help filter out candidates who aren’t a good fit. And they have already introduced them to the benefits of franchising.”

What they do

A typical broker represents dozens, sometimes hundreds, of franchisors, serving as an intermediary between a qualified candidate and an associated franchise brand or, if in place, the franchisor’s outsourced franchise sales organization.

“We are like headhunters for the top-shelf franchisors,” says FranNet CEO Jania Bailey. “We are part of their marketing and are in the business of helping them find the best people for their franchise.”

This introduction doesn’t come cheap. Franchise broker commissions vary, but are typically 40% to 50% of the franchisor’s one-time, nonrecurring franchisee fee paid when a referred candidate signs a deal. Brokers earn even more when a deal leads to multiple agreements or territories.

The tab for recruiting new franchisees also extends beyond placement fees, which average nearly $30,000. Most brokers belong to a broker or lead referral network that connects franchisors and brokers and serves as an alternative lead source for the vetted franchise brands they represent. These groups also provide networking, training, resources, and marketing support to increase the exposure and reach of franchise opportunities. They may include brand sponsorship of conferences or other networking events.

Brokers may wear two hats—educating and advising franchise prospects about their options to find the right fit free of charge, and identifying and vetting potential franchisees for franchisors—but they earn their bread from the franchise brands. Once the selling starts, they exit the scene and leave the heavy lifting to the franchisor.

It’s not cheap

PuroClean works with every broker group in some capacity to help “load balancing of the leads,” says Tim Courtney, the brand’s vice president of franchise development. PuroClean pays a $30,000 success fee for a broker-generated lead that turns into a deal, along with $1,200 to $4,000 for monthly broker membership or other related costs.

Courtney says “pay to play” is the only way to gain good traction here. “I think broker groups are a necessary evil in development, as long as you use a deal ratio you are comfortable with,” he says. “We used to be above 60% broker usage. As of 2022, we’re down to 15%.”

The rising cost of doing business with brokers has some franchisors rethinking their lead development strategy. “At my peak, we received six to 10 territory checks per day across the network of brokers,” says Joe Malmuth, chief franchising officer at Batteries Plus. “There wasn’t much consistency to it. I closed a total of nine units across three sales—three individual brokers and two networks. Some networks boasted more than 400 individuals, but this made no difference in the end results.”

Batteries Plus pays up to $30,000 in success fees to brokers when a referral signs a franchise agreement, says Malmuth. “At my peak broker usage, it was over $6,000 a month across the networks,” he says. “Some networks required my sponsorship of certain broker events, like regional broker discovery days. Travel and logistics for my team could be lumped into these costs as well—at $5,000 to $10,000 a pop.”

Growing pains

Jania Bailey has seen the franchise sales universe expand from 400 brokers in 2006 when she joined FranNet to more than 4,000 brokers and dozens of broker networks today.

“If you look at the industry, it’s very low cost to hang out a shingle and say you’re a broker, and it’s very little cost to start a broker group,” she says. “As commissions have increased over the years, people saw this as easy money, and that has attracted a lot of people into the industry. Some even advertise this as a part-time gig where you can pick up one or two deals a year for $30,000 to $50,000. It just gives me cold chills.”

Bailey is not alone here. The growth of franchising and the rise of third-parties in franchise lead generation and sales has attracted increased governmental scrutiny over whether prospective franchise owners need more protection in their contracts with franchisors, such as additional disclosures and increased regulation of fee structures.

Under Bailey’s watch, FranNet has sought more transparency in the relationship between the franchise candidate and broker, creating the FranNet Client Bill of Rights and the Broker Disclosure Document. In addition, its consultants are required to take the IFA’s Fran-Guard course, the legal and business compliance component of the CFE program.

“I tell our people and our franchisors that it is not about your next commission. This is about doing the right thing every time because no amount of money is worth betraying a trust or jeopardizing someone’s life savings,” says Bailey.

At Business Alliance, Inc. (BAI), training and education for both the consultant and the franchisor are central to its performance-based model. Its franchise consultants, considered “trainees” in their first year, get up to speed through in-person training, web-based programs, mentorship, and roundtable sessions. All consultants complete a franchise sales disclosure form annually that is available to franchisors upon request.

More recently, BAI has added training on how to work with FSOs to ensure they know how to handle referrals and take candidates through the sales process of the brands they represent, says BIA President Natalie Barnes.

“We don’t need additional legislation or regulation,” she says. “But I do think we need to define how we educate about the differences with an FSO and how we bring clarity with the terminology about consultants and brokers.”

Working hard for every lead

Higher commissions don’t guarantee a broker’s success in serving up a consistent pipeline of quality candidates, or ensuring that a franchisor will land on every broker’s referral short list. Brands must choose reputable brokers and networks and work with them strategically to align with their growth plans and budgets.

Wood cautions that partnering with brokers is not a “magic fix” to franchise sales. The franchisor must also sell itself with a proven sales process, solid management and operations, strong validation, and marketable systems to support the franchisee and the sustainability of the brand.

As with many aspects of franchising, it’s essential for franchisors to build relationships with brokers that are mutually beneficial—and to have the resources to help brokers understand the benefits of their brand. “We have to work hard to prove ourselves and fight for every lead,” says Wood.

How Do Brokers and FSOs Differ?

The growing role of third-parties in franchise development can be confusing for franchisors and franchisees alike, particularly with the ubiquitous and interchangeable use of “consultant” by professionals throughout the industry.

Franchise veteran Red Boswell saw it firsthand earlier this year when he spent two days at the Titus Center for Franchising at Florida’s Palm Beach Atlantic University. The franchise development boot camp was filled with expert panelists, keynote speakers, and networking opportunities for established and emerging brands looking to improve their sales process.

Brokers and FSOs were seemingly mentioned “every third sentence,” says Boswell, president of the membership-based franchise brokerage group International Franchise Professionals Group (IFPG) and FranchiseWire.

“On the last hour of day two, someone raised their hand to a panel and said, ‘I’m confused. What is the difference between an FSO and brokers?’” Boswell recalls. “I looked around, and half the room was nodding their heads in affirmation. I thought, ‘This is sad.’ It’s such an elementary topic. For us to be this deep into the core of what we’ve been talking about, and people don’t even know?”

While franchise brokers and FSOs have a common goal in pursuing leads and sealing deals, their roles in franchising are as distinct as those of franchisor and franchisee:

  •  Brokers are high-quality lead providers.
  •  FSOs are outsourced franchise development.

“Franchise brokers are extremely high-quality lead providers,” Boswell says. “We do stay involved throughout the process with a lead to help the franchisor and the candidate move through the process efficiently and confidently. But we do not replace any steps in their franchise discovery process, nor do we replace anyone on their franchise development team—and that franchise development team might be an FSO.”

As an extension of the franchise brand, an FSO executes a significant part of the mutual evaluation process with a franchisee, freeing the franchisor to focus on enhancing operations, and growing their business by keeping franchisees profitable and happy.

“Understanding the complexity of the relationship with the sales process is one of the benefits and one of the reasons we do what we do and why brokers work with us,” says Michael Peterson, president and founder of Franchise Beacon. “My first deal in 2022 was 1,485 days from the first call to the franchise agreement. We did one recently that was 55 days. Franchise sales are complicated.”

The cost to bring on these franchise development specialists varies by FSO and the scope and complexity of the services they provide. These often are negotiable based on the size of the franchisor, number of units sold, and the support level the brand requires. Traditional FSOs typically charge a monthly retainer and a commission on the sale of a franchise agreement. Others require equity stakes in exchange for value-added services or, less frequently and more controversial, royalties.

It’s essential for franchise brands to understand what FSOs are not, says Peterson. “FSOs generally are not franchise brokers, and they are not lead generators,” he says. “We are not in any way going to bring you people to buy a franchise. You, as a franchisor, are going to somehow generate those leads. We may manage that process for you, but you are writing the checks and making the decision. If you are looking for someone to help you generate leads, you need to go with a broker. It’s the one thing I think people really miss—there’s literally no overlap between us and a franchise broker.”

Franchisors aligning with the right franchise brokers and/or FSOs can result in a rewarding stream of prospects. But it’s still up to the brand and their franchise sales organization or team to turn a “warm” lead into a signed and sealed franchisee.

“It’s the franchisor at the end of the day that’s doing the closing,” says Keith Gerson, president of franchise operations at FranConnect. “The franchise sales organizations often are similar in that they’re doing all the work, all the heavy lifting, making the calls, and communicating the sales process all the way through. But it still requires the franchisor to approve the deal and bring them across the finish line.” Or not.

Differences Abound

Franchise development is a numbers game where all leads—in both quality and cost—are not created equal.

“On one end of the scale, a franchisor may use sources like Internet portals to produce leads. These are relatively inexpensive on a per-lead basis, but the quality is such that it often takes many hundreds of such leads to produce one new franchisee,” says Jeff Elgin, CEO at FranChoice, whose 85 active consultants help match franchise prospects with the approximately 100 franchisors that are on the franchise referral network’s roster each year.

Elgin says FranChoice’s consultants do their own prospecting to find general franchisee candidates who are financially qualified and motivated to become franchise owners, but who don’t know how to find an opportunity that’s the right fit for them.

“We spend hours with each candidate discussing and learning about their resources, interest, and goals,” says Elgin. “Our consultants can then determine a few franchise companies they think have a reasonably strong chance of matching up well with the candidate.”

So do fees

The fees brokers and franchise brands pay networks differ widely based on the brokerage group’s structure and the affiliation level within the network. Brokers looking to widen their nets may belong to multiple franchise networks.

For example, IFPG has 650 consultants, 620 franchisors, and 120 vendors who pay a membership fee. The average franchisor pays $1,000 monthly to market their brand to IFPG’s consultants, says Boswell, who says 100% of success fees go directly to the consultant.

“We don’t get a penny of commission ever on anything,” says Boswell. “We are a marketing company for franchisors to market to consultants. We don’t have any minimum commissions, but we do advise, guide, and consult with every franchisor. It’s very important to structure your franchise fee and your commission structure appropriately to make it attractive for all.”

On the other end of the spectrum is Business Alliance, Inc., a performance-based franchise brokerage firm with 175 brokers and 355 franchisors focused on results.

“Everyone wins when we send a qualified referral,” says BAI President Natalie Barnes. “We are tied to the contracted commission agreement. We do the collection of the commission and get a percentage of that commission. So we are very tied to bringing franchisees to the franchise companies.”

FranNet has 75 brokers and works with more than 250 brands. The franchise brokerage firm requires an annual fee to be part of its portfolio and earns 10% of a franchise broker’s negotiated placement commission.

“We’ve invested a lot in marketing and support and have three people whose full-time job is working with our franchisors and vetting new ones,” says Bailey. “So there’s a lot more to that, and I’m proud of that fact.”

Broker Deals by the Numbers

In the end, quality lead generation is all about conversion. No one knows that better than Keith Gerson, FranConnect’s president of franchise operations, who has been benchmarking real-world franchise development for years.

Franchise brokers had a lead-to-deal conversion rate of 5% in 2022—the highest among all paid lead sources (second overall behind organic referrals from family, friends, associates, and customers), says Gerson, who crunched the performance numbers of brands using brokers based on FranConnect’s internal data.

Looking through the eyes of a broker, a portal lead that averaged a 0.4% lead-to-sale conversion rate would take 250 leads to make one sale, whereas a broker-generated lead would translate to an average of 20 leads to close one sale. This is significantly higher than the overall average conversion rate of 0.97% from all lead sources, which equates to an average of one franchise agreement for every 100 leads, says Gerson, who supplied the following metrics based on FranConnect’s client base.

  •  Of the 723 brands that are part of FranConnect’s 2023 Franchise Sales Index, 525 tracked or otherwise received leads; 198 did not show tracking or evidence of leads.
  •  Of  525 brands in this sample, 134 accounted for 21,261 broker-referred leads. (Note that not all FranConnect’s brands work with brokers.)
  •  Of the 525 brands, 131 received one or more broker leads in 2022; 96 received two or more leads.
  •  Among those 131 brands, 1,063 broker deals were completed by 73 brands (some deals were 2- or 3-packs).

So, 54% of brands that received broker leads closed deals. 

By number of units (1 or more broker leads)

For those 131 brands that received one or more broker leads and segmented by franchise locations, the breakdown was as follows:

  • Enterprise (301+ locations): 28 brands
  • Upper Mid-Market (101–300 locations): 38 brands
  • Lower Mid-Market (76–100 locations): 29 brands
  • Growth/Emerging Brands (1–75 locations): 36 brands

By number of units (2 or more broker leads)

For those 96 brands that received two or more broker leads and segmented by franchise locations, the breakdown was as follows:

  • Enterprise (301+ locations): 23 brands
  • Upper Mid-Market (101–300 locations): 27 brands
  • Lower Mid-Market (76–100 locations): 20 brands
  • Growth/Emerging (1–75 locations): 26 brands 

Deals by sector

Of the 1,063 total deals, 68 franchise brands accounted for 925 of them. There also was an FSO in the mix that closed 108 of those deals.

Segment

# Deals

Commercial & Residential Services

410

Personal Services

335

Business Services

179

Retail Products & Services

79

Lodging

34

Automotive

11

Fast Casual

8

Retail Food

4

Specialty Food

3

Total

1,063

As you can see, the majority of deals were generated in Commercial & Residential Services, Personal Services, and Business Services. Conversely, you’ll note that brokers don’t do much work in the area of QSR. FranConnect doesn’t have any QSR restaurants in its database that saw sales coming from brokers. Most brokers find that between the cost of a QSR startup and the fact that most QSRs require a candidate to have previous restaurant experience, the pool of candidates narrows for this sector.

We might conclude that Commercial & Residential Services were the hands-down leaders with broker deals based on a low cost of entry and the shift away from “office-centered” offices to home offices, along with the understanding that with people moving away from indoor events and get-togethers to home-based get-togethers. And, as people were spending more times in their homes, they were making investments in remodels and outdoor space enhancements.

 

Published: October 29th, 2023

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