3 Ways Franchise Brokers Deliver Value to the Franchising Community

“They want how much money?” I asked Jason Killough, who served as my VP of franchise development at a major franchise company where I was the CEO.
“Fifteen thousand,” he said.
“Fifteen thousand dollars to send us a lead to buy a franchise? Are they out of their minds?”

Look at all they do!

Calmly, Jason continued, “It’s not just to send us a lead, John. First, they find the lead. We don’t! Keep in mind, it costs us about $10,000 just to find a good lead. They find the lead, they educate the lead, they introduce the lead to our concept, they teach them about our business, they send us only leads that make sense for us, and they get them ready for us to close the deal.”

“We’re in the wrong business, my friend!” I said to him. “With as many people who call me about buying a franchise every year, I need to be in that business.”

Good brokers deliver quality franchisees

Jason laughed. He knew I was teasing, but I thought $15,000 was a lot of money, and I still do. However, after agreeing to several contracts with brokers, and paying them up to $15,000 for their services, which resulted in quality franchise sales, I changed my opinion.

Used to be I’d tell my clients, “Don’t use a broker to sell your franchises. You don’t need to! You can do the lead generation and selling on your own. I’ll show you the process.”

That was then. This is now. And for several years it’s been a different world for everyone.

Not all brokers are created equal

I’m still cautious about using brokers. Too many of them are not dependable. Too many of them are in it for the money and they do not add value, which is truly matching a franchise prospect with the right franchise opportunity.

However, like everything else that involves contractual relationships, when you bring together the right parties, you make beautiful music. Or perhaps in this case you make beautiful franchising.

Making beautiful franchising

David Omholt, founder and CEO of The Entrepreneur Authority (TEA), is making beautiful franchising with franchisers. He’s doing it for dozens of companies represented by his network of brokers scattered across the USA. Years ago, before he launched TEA, David visited with me for some start-up advice. I thought he was crazy!

Who needs brokers? Do what? Launch a brokerage service? Why?

Franchisers don’t want that. Franchisers don’t need that. Good luck, pal.

Integrity sets TEA apart

As it turned out, Omholt didn’t need my advice because he had a well thought out plan – his background as a consultant with Accenture prepared him for his launch. What helped him most of all, however, was his commitment to integrity. This wasn’t a quick-buck artist who was going to rope people into buying businesses they didn’t want and weren’t prepared to operate – this was a guy who understood the value of building relationships and serving the same customers over and over and over again.

I still thought he was crazy to launch a brokerage, but I trusted that he would do so with integrity. In fact, he’s the only broker to have won the Chairman’s Award at the American Association of Franchisees & Dealers, in recognition of the standards he has set for brokers.

So I asked David Omholt about why franchisers should use brokers. Here’s what he told me:

Three good reasons to use brokers

Local scaling. “We’re surgical by nature,” he said. “We work locally so we meet prospects face-to-face. We’re not just working Internet leads, or talking to faceless people. We know the local marketplace, we get to know who’s looking for a franchise in that marketplace, and we get to know them personally. We target a specific market so we can find good franchisees. We help a franchiser cluster their units in a region because we’ve got the region covered. We’re the franchiser’s best source for filling in their markets.”
Better royalty producers. “We can find the better franchise candidates and match them up with the franchise opportunity that makes sense for them, and as a result they become better producers for the franchiser,” Dave continued. “We meet face to face with every candidate. We get to know them. We understand their likes and dislikes. We know the kind of business they want to own and we also get a sense for the type of business that they will be good at developing. And we don’t represent just one franchise, so we’re not limited, and the prospects know that. An in-house sales guy has one franchise to sell and he’s going to sell it to that prospect. But that’s not our situation. We have many different types of opportunities to sell and we can afford to match the prospect to the best opportunity. That’s how we find the better fit. We can see the mistakes and cut them off at the pass, so once our candidates become franchisees, they tend to be the better royalty generators.” . . . I can personally attest to that point. TEA found some of the best producing franchisees for HomeVestors. Those candidates would not have bought a HomeVestors franchise without TEA leading them to the opportunity – knowing that at the time it was the best opportunity for that candidate.
Cost optimization. “We’re efficient for a franchiser because by outsourcing to us, a franchiser can reduce in-house development expenses,” Dave explained. “A franchiser can bring down the cost of supporting an in-house development team by utilizing brokers who will find the best prospects for the franchise company. Since we’re paid on performance only, it’s not a hard check to write when we deliver a candidate. Plus, that candidate has already been educated – we’ve answered all their general questions – so the in-house team can quickly zero in on a prospect’s specific concerns and close the deal. We reduce the franchiser’s expenses.”
Numerous brokers to choose from
Franchisers who work with brokers generally work with more than one – they don’t often restrict themselves to exclusive deals. The latest issue of the Franchise Opportunities Guide, published by the International Franchise Association, lists more than 25 companies that provide brokerage services to franchisers.
Franchisers will find that the commission structures are similar among brokers – they’re all in that fifteen k-plus range – but their capabilities will vary. Since they’re not all created equal, it’s important to do your due diligence before you sign a contract with a broker.

Who knows what that broker is doing?
One of my concerns about brokers – and a concern that many franchisers voice – is controlling what they do and say. “How do I know what the guy is telling prospects about our business? . . . How do I know that she’s not misleading candidates financially about our opportunity?”

Brokers do not close the deals
Those are valid concerns, and they need to be addressed with the brokers at the time of forming a relationship. Keep in mind, however, that brokers do not close franchise sales. For $15,000 you’d think they would – but it’s better for the franchiser and the franchisee that they do not!

Franchiser closes the deal, or not
They lead the candidate to the franchiser’s sales team, and it’s the sales team’s job to close the sale. As Jason Killough told me when we initially discussed using brokers, “They tee up the deals for us. They don’t close them.”

The franchiser has the opportunity to ask the candidate what they know about the franchise, what the broker told them about the business, and what they expect if they become a franchisee. “We have the chance to agree to a sale or to deny it. It’s always our decision,” Jason assured me.

No deal no broker fee no beautiful franchising
So if a candidate was misled, the franchiser doesn’t close the deal, at least not without correcting the misinformation. Of course, if the deal doesn’t get closed, the broker also doesn’t get paid. And a broker who misinforms one candidate is likely to do it again, and that’s a broker who will quickly wear out his or her opportunities to make beautiful franchising.

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Franchising Strategy: Strategic Business Plan Development

As with any business, you must have a solid business plan. Do not think that you can start a franchise without a good plan. The plan is a roadmap to how you will operate, how you will reach new franchisees, how you will market your business and must have solid financials. A mistake of a single percentage point on a franchise royalty can easily cost you millions of dollars. It does not seem like a big mistake, when you have a single franchisee. It simply means that the franchisor will make $5,000 less in royalty revenues. But in franchising, we are talking about continuing growth, and this mistake might be multiplied 100 times or more. Other business decisions that a new franchisor will make that could impact long-term profitability include:
• Advertising fees
• Technology fees
• Product margins
• Type of franchise offered (individual, area development, area representative, etc.)
• Organizational structure
• Compensation structure
• Geographic growth strategy
• Territorial rights provided to franchisees
• Reservations of rights for the franchisor
• Franchise Disclosure Documents
Conflicting or ambiguous communications when a franchise is first sold can form the basis for future franchise litigation. The cost of defending any franchise lawsuit, even an inconsequential one, can be enormous. The cost of prosecuting even a “small” franchise litigation lawsuit can easily exceed $100,000 to $200,000, or more.
You must have a solid, coherent Franchise Disclosure Document. An integrated Franchise Compliance Program that stipulates rules and expectations, manages Franchise Disclosure Documents and controls the publishing of all information is extremely important. It is also one of the best investments a franchise company will ever make.
Understanding a franchise agreement
A Franchise Agreement includes all of the key facets, requirements and principles of the franchise, including the privileges and commitments of both parties, the length of time the agreement will last, the territory (if any) granted to the franchisee, and the costs involved and how they are to be calculated.
A Franchise Agreement is the foundation of your business. You must be certain that you understand it clearly before you start to build on it. The following is an outline of some of the key aspects contained in Franchise Agreements.
Every Franchise Agreement needs to be carefully read and you should therefore have your attorney review the Agreement clause by clause with you, to make certain that you understand all of its terms. Franchisees also need to be aware that, while it can be relatively simple to enter into a Franchise Agreement, it may be far more difficult to remove yourself from one. A standard Franchise Agreement is a long-term commitment to a third party (often of six to ten years in length). The Agreement will include stringent requirements which have to be complied with for the full length of the term. Failure to conform to these requirements may in many situations allow the franchisor to terminate the Agreement.
While the strict stipulations of Franchise Agreements are there to protect the interests of all parties and particularly the franchise system, from time to time Franchise Agreements can include or exclude clauses which aim to protect the franchisor.
A provision that any costs involved in defending the use of the trademark should be paid by the franchisee
Immediate rights for the franchisor to cancel without notice if the franchisee misses or delays payment of royalties
Lack of clauses regarding ongoing support, training and development of the business by the franchisor
Limitation of the franchisor’s liability to the franchisee even if the franchisor breaches their requirements to the franchisee
Widely drafted clauses undermining a franchisee’s ‘exclusive’ territory in unwarranted circumstances.
The presence of these clauses will vary between Franchise Agreements. An experienced franchise lawyer will be able to highlight them for you. Some franchisors will not be willing to make any changes to their agreements especially when there are other franchisees already in operation.
Regardless of what you may dislike about some provisions in a Franchise Agreement, it is nevertheless essential that you understand it fully and the requirements it places on you as a franchisee. Careful attention should also be paid to supplementary documents, as these may contain provisions that, if breached, constitute a breach of the Franchise Agreement.
You should also be certain that any pre-contractual statements regarding turnover or other aspects of the business that may have attracted you to the franchise are carried over into the Franchise Agreement or in some other written form.
Grant of Rights
The Grant of Rights sets out the term of the franchise and its renewal provisions. It is important to make certain that the term of the franchise is adequate to allow you to achieve a realistic return on your investment. Renewal provisions need to be looked at carefully along with any renewal fees. They may contain some or all of the following:
Notice of renewal – this is usually required within strict timeframes. If the renewal notice is not given in time, the right to do so may be lost
Payment of renewal fee
Changes to terms of the Agreement by the franchisor upon renewal
Changes to the franchise territory size by the franchisor where the particular Agreement provides exclusive rights to the franchisee
Changes, alterations and improvements to operating practices to meet competitive and other challenges
First options or first rights of refusal for additional franchises.
It is important that the franchisee understands that, more often than not, the right of renewal may in fact be a right in favor of the franchisor. The franchisor often has the ability to reject the renewal if a franchisee has not been performing to set standards.
Ongoing costs and royalties
Many Franchise Agreements include ongoing payments to the franchisor such as:
• Royalties
• Advertising levies
• Mark-ups or margins on products supplied by the franchisors
• Training fees.
There may also be requirement to attend franchise conferences and other meetings. The Agreement should clearly set out the details of what has to be paid and when, including circumstances relating to any deposits payable before securing the franchise.
For advertising and promotion costs, the Agreement should specify when the payment is to be made and to whom, including details of any special banking arrangements. Back-up assistance and assistance are essential to the operation of a successful franchise. Details of the support and training to be provided by the franchisor should be stated in the Agreement, including both initial and ongoing assistance. As well as having your attorney review the Agreement for these provisions, talk to existing franchisees about the level of support they have received.
Initial costs
The Agreement, or often an ancillary document, should set out in full all beginning costs. These may include the initial franchise fee, equipment costs, working capital requirements, fit-out costs, initial training costs and the cost of opening stock.

Premises, leases and mobiles
Lease provisions usually allow the franchisor to take over the lease at the end of the term, and also if the franchisee defaults during the term
Often the franchisor will lease the property itself and grant a sub-lease to the franchisee. You are responsible for paying the rent, so you should ensure the amount negotiated is a fair market rent
Mobile franchises usually contain terms that set out the sign writing and other décor required by the vehicles from which the business is operated, and possibly for any major items of equipment
One issue that is often overlooked is the need to ensure that the length of the franchise term coincides with the length of the lease term.
Every Agreement should contain clauses setting out the initial and continuing requirements of both franchisor and franchisee
• Examples of franchisee requirements include minimum operating hours, insurance, engagement of staff, and uniform requirements.
• Examples of franchisor’s requirements include maintaining the manuals, providing products, and training
• Records of accounting must be up-to-date, with regular reporting and auditing
• Intending franchisees should pay careful attention to the requirements since breach of any may entitle the franchisor to terminate the franchise.

Intellectual property
Intellectual property is a key element of most Franchise Agreements, specifying legal ownership rights by the franchisor concerning patents, copyright, trademarks, designs and even operating systems. Other relevant laws include the Fair Trading Act and common law rules prohibiting the copying of a business’s identity.
Sale of the franchise
Most Agreements will allow the franchise to be sold during its term, but you should note that as a franchisee your rights to sell the business may be restricted.
• The franchisee may have to give the franchisor the right to buy the business first known as right of first refusal, which in itself can destabilize the value of that business and the goodwill for a selling franchisee
• If the franchisor chooses not to purchase, they may rigorously control the sale process
• The incoming franchisee must be approved by the franchisor
There may be a transfer approval fee, which the franchisee will need to pay to the franchisor when a sale takes place. This is designed to cover the franchisor’s costs involved in training the incoming franchisee.
In some Franchise Agreements, the term of an existing franchise for sales purposes covers only its unexpired remainder, unless the Agreement provides for the franchisor to offer a new Agreement for a full new term.
Franchise Agreements provide for circumstances in which the Agreement may be terminated in advance of the original ending date. These include:
• Bankruptcy, company liquidation or criminal conviction of the franchisee
• Termination of leases to the franchise premises (where premises retention is important).

Termination provisions should be considered carefully as they are often points of disagreement. There are frequent misunderstandings by franchisees as to what happens at the end of a term and procedures vary from one franchise system to another. However, it should also be kept in mind that if the franchise is operating well and the franchise relationship is a good one, it is likely that both franchisee and franchisor will want to renew the Agreement.
Although disagreements between franchisors and franchisees are usually solved through discussion and negotiation, mediation and arbitration are also effective methods for working out disputes and less damaging to franchise relationships than legal proceedings.
Other terms
The Entire Agreement clause is especially important as it usually states that what is contained in the Agreement overrides anything which may previously have been promised unless it is expressly referred to in the Agreement
As a franchisee, you should be certain that anything on which you have relied in selecting your franchise is included in the Agreement in some way
The Definitions section, usually close to the beginning of the Franchise Agreement, contains key definitions. One of the most important is Gross Sales, the figure on which the franchisor’s royalty is usually based. Usually this covers substantially every type of transaction carried out by the business and almost every payment received. Often it will include sales made, whether or not payment has actually been received.

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