What Franchisors Should Know about Working with Brokers

Franchisee recruitment is the lifeblood of any franchise. Franchisors are constantly seeking qualified leads that will bring successful franchisees to help growth the system. It is a time-consuming and costly process, but can be one of the most critical parts to ensuring a franchise's success.

One of the most common resources franchises use to find qualified candidates is through brokers. Most brokers act as a headhunter for the franchisor, bringing them prospects who are the best fit for the brand. As a third-party service, brokers can save franchisors considerable time by introducing candidates to the brand and filter out those who may not be a good fit. The brokers may serve multiple roles in advising prospects about their best options while also vetting potential candidates for the franchisor.

While the use of brokers can be very efficient and effective, it does come at a considerable cost for the franchisor. Although commissions vary, they are typically 40 percent to 50 percent of the franchisor's one-time, nonrecurring franchise fee after a referred candidate signs a deal. Placement fees average nearly $30,000. Brokers can earn more with deals that lead to multiple locations or territories.

Many brokers are also a part of a lead referral network that connects franchisors and brokers and acts as an alternative lead source for the brands they represent. The groups offer resources, networking, training, and marketing to increase brand exposure and the availability of franchise opportunities. Franchisors work with multiple broker groups and can pay several thousand dollars each month to be a part of these network groups.

As franchising continues to grow and become more competitive, the importance of franchisors receiving qualified candidates that are a proper fit also increases. This is especially true amid rising economic factors such as inflation, supply chain and labor problems, and legislative uncertainty heading into the presidential election. That only strengthens the need for franchisors to work with brokers who can deliver qualified candidates who are a match for the brand.

This growth in franchising has also led to concerns about whether prospective franchisees need more information and protection in their contracts with franchisors, such as additional disclosures and increased regulation of fee structures. Government agencies are seeking legislation that requires third-party sellers such as brokers to share important information about themselves that franchise candidates need prior to them making a major financial commitment.

The California Senate recently passed a bill that extends disclosure requirements for third-party franchise sellers within the state. The bill would amend the California Franchise Investment Law to add annual registration and pre-sale disclosure requirements for these sellers. The sellers would need to provide prospective franchisees a disclosure document with information about their business. The document would include details about the seller's professional experience, certifications, litigation history, services performed and compensation structure, industries represented, and list of franchises sold over the previous year, among other information.

It is important for franchises to work with reputable brokers and networks who will consistently recommend qualified candidates. Despite the high associated fees of working with brokers, many franchisors consider the process a necessary requirement and the cost of doing business. However, partnering with brokers is just one part of the franchise sales process. The franchise must have a foundation of strong management and operations, proven sales process, and established system to support its franchisees.

The full article about what franchisors should know about third-party sellers can be found in Issue 3 of 2023 Franchise Update Magazine HERE.