Recruitment: Do It Yourself or Work with Third Parties?

At MSA, we prefer our clients to internalize their franchise recruitment efforts. Third-party services like brokers can be useful for new franchises because they can add an additional level of validation for the system. However, those services may not be available for an emerging franchisor, and for most franchisors, they are unnecessary and may not even be beneficial.

In our book Franchising Management for Dummies, we discuss the risk of using franchise-packaging firms. We explain that some franchise packagers also try to act as your broker in exchange for a percentage of your continuing royalty. Without question, these service providers should be avoided. (Note: This article is excerpted from the book.)

Franchise packages that offer to sell franchises for you frequently offer lower fees or even charge nothing for the development of your franchise system in exchange for taking a percentage of your franchise fee, your continuing royalty, and even some equity in your franchise system. Their income comes from commissions they make on selling franchises for you.

Your focus as a new franchisor should be on developing a franchise system that is sustainable because you selected the right franchisees and have the necessary revenue to support your obligations to them. The problem with franchise brokers is that their goals won't necessarily align with yours. Their goal is to earn a portion of your initial and continuing fees. Therefore, sustainability of your franchise system is not necessarily a high priority in how they advise you in the development of your franchise system.

For a broker/packager to be successful requires them to sell franchises quickly rather than intelligently. Their goal is to award as many franchises as they can, rather than to only the right candidates. This often means that the initial and continuing fees, as well as the obligations for the franchisor and franchisee, are established for that goal alone. Thus, their selection criteria for selling franchisees may not be aligned with the selection requirements necessary for sustainability of the franchise system.

Consider also that even if the franchise broker does not ask for equity, they often will ask for up to 50 percent of your franchise fee, and frequently a minimum fee that is even higher. They also will often require 10 percent or more of your continuing royalty.

Run the numbers. After paying the franchise broker a portion of your initial and continuing fees, what will be left for you to sustain your franchise system and earn a reasonable return on your investment? Also, your contractual responsibilities will continue, whereas the broker's will end once the franchise agreement has been signed. Working with a broker has the potential for serious conflicts of interest and long-term financial problems and is a relationship emerging franchisors should avoid.

For most franchisors, internalizing their franchise recruitment process is preferable. With proper training and support, new franchisors can effectively do so. Professional consulting firms can provide their clients and their staff with the tools required without giving up equity or revenue. For example, we use an incubator approach for our emerging franchise clients that trains our client's staff; or, if needed, helps recruit personnel to execute their unique selling program.

 Michael Seid is managing director at MSA Worldwide. Contact him at 860-523-4257 or mseid@msaworldwide.com. Joyce Mazero, a shareholder with Polsinelli PC, a law firm with more than 850 attorneys in 22 offices, is co-chair of its Global Franchise and Supply Network practice. Contact her at 214-661-5521 or jmazero@polsinelli.com.