Do You Need A Franchise Broker?
Entrepreneur|Startups Summer 2017

You want to buy a franchise but don’t know which one. A booming industry of franchise brokers wants to help—but first, you need to tell the difference between a true expert and someone just trying to make a buck.

Jason Daley

Lisa Tubbs spent 20 years in the corporate world as a successful project manager, then finally succumbed to the itch to run her own business. She wanted to follow in the footsteps of her father, a commercial fisherman, and her grandfather, a plumber. So in 2016, she took a buyout at her job and then met with a career transition adviser to explore her options. His verdict was that she had an entrepreneurial spirit but maybe not the confidence to go it alone. Franchising was just the thing for her.

Which franchise should she buy? Tubbs was eager to find the answer. She read up on the industry and visited the International Franchise Expo in New York City. But like many potential franchisees, she was overwhelmed by the sheer number of brands and their jargon heavy pitches. So she asked her career adviser for help, and he told her to contact a franchise broker.

It was a decision that could have made her career—or complicated it.Franchise brokers are a relatively new entity in the world of franchising. They’re a form of middlemen: They help a potential franchisee narrow down their choices to a few brands that fit their particular skill set and budget, and then look into the finances and track records of those brands to make sure they’re worth considering as an investment. In exchange for connecting a franchise with a new buyer, the broker scores a commission from the franchisor.

It can be a helpful service, guiding future franchise owners through many complex options and on to success. But in the past 15 years, the number of franchise brokers has exploded—going from a small handful to an estimated 1,500 in the United States. That’s been fueled by an uptick in franchising more broadly: There are now 3,473 franchise brands in the country, with at least 300 new ones launching each year, and they offer varying levels of information, disinformation, and hype. And as competition for new franchisees has risen, so have the commissions some franchises are willing to pay. In 2007, a broker might have gotten $10,000 a sale. Now that’s double.

Business like this is bound to attract a mix of reputable insiders and disreputable opportunists, and the industry hasn’t totally managed to separate the two. There are no licenses or certifications required to become a franchise broker. Literally anyone can work as one, whether or not they’ve ever heard of an FDD (franchise disclosure document, the legally required prospectus given to all potential franchisees). And because brokers are paid based on commission, they may be incentivized to push clients toward the franchisors who are willing to pay the most—and not, say, the ones that may be the most suitable for a future franchisee.

“They use these assessment tools that are usually meaningless,” says outspoken broker critic Michael Seid, a 30-year franchising veteran, founder of the consultancy MSA Worldwide, and author of Franchising for Dummies. “If the best franchise for you is a hairdresser, and they don’t have a financial relationship with a hairdresser, then they might suggest a pet store. What’s good for the broker and the franchisor may not be that good for the potential franchisee.”

Tubbs knew none of that when she called her franchise broker. But anyone who follows her path should at least know this: There are ways to tell a good broker from a bad one, but you need to do your homework.

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