VF Franchise Consulting

What Is A Franchise Broker?

Oct 21, 2020

what is a franchise broker - franchise broker definitionIf you’re considering buying a franchise or putting one up for sale, it’s important that you know all your options before you make any commitments. That’s why it’s a great idea to hire a franchise broker. But what exactly do they do?

What is a franchise broker?

Franchise brokers are hired by individual franchises to spread the word about their investment opportunities and find suitable candidates to become franchisees. One broker will be affiliated with a number of franchises, and try to encourage qualified entrepreneurs to join one of them.

If they’re successful, they get paid a commission as the entrepreneur invests. Although it doesn’t cost anything for potential investors to enlist the services of a franchise broker, they will probably end up paying them for their help if they choose to start one of the broker’s franchises, as their commission is usually 40-50 percent of the franchise fee.

Why should investors use a franchise broker?

Because franchise brokers are effectively employed by a number of businesses, they have a wealth of knowledge on the opportunities that are out there. By discussing your background, qualifications, interests and budgets with you, they can give you an idea of the type of franchises that would be right for you. They’ll also have expert insight into the franchise’s requirements and any obligations franchisees would have once they’ve signed on the dotted line.

This can save a huge amount of time when it comes to researching available opportunities. There are thousands of franchises out there and most of them are looking for new franchisees, so it could take months or even years to decide on the ideal one. Franchise brokers can provide a shortcut. They’ll know their portfolio of businesses inside out, so they’ll be able to identify suitable ones. They may even highlight franchises or sectors investors wouldn’t otherwise have considered.

Why should investors be wary of using a franchise broker?

Some investors are hesitant to use the services of franchise brokers because they think they might be biased. If the broker has the chance to win a huge commission from a franchise, they’re likely to push entrepreneurs in that direction even if they’re slightly incompatible.

However, if franchise brokers keep sending unsuitable people to a business, it won’t be long before it becomes dissatisfied with their work, and it may even decide to let them go. Therefore, franchise brokers should have a vested interest in finding the right candidates for franchise opportunities.

What’s more, prospective franchisees are under no obligation to follow the broker’s advice or approach the franchises suggested. They can simply walk away if they want to, having gained the insight for free.

Having said this, it’s important to note that individual franchise brokers only work with a certain number of businesses, so they’ll overlook a huge swathe of opportunities too. Use them as a sort of ‘eye-opener’ – they can introduce you to ideas, but you should use them as your only research tool.

How can I use franchise brokers to advertise my franchise resale?

It can be beneficial to recruit someone to take on the responsibility of selling your franchise, from finding the right buyer to commanding the best price. Choose someone with a strong track record of sales – preferably with another franchise in the same sector – and be prepared to offer a generous commission to attract the best brokers.

However, bear in mind that finding a full-time franchise broker can be a lengthy and costly process. This is because you may need to commit several weeks or months to create a job specification, prepare and conduct interviews, and perform reference checks before you can hire your new salesperson.

Consider hiring a franchise sales outsourcing (FSO) firm

On the other hand, some franchisors prefer to hire FSOs to manage activities such as recruitment and marketing, especially during busy times in the franchise’s development. Outsourcing can be a great way to save money, especially if your brand is a seasonal business. For example, a franchise that gets most of its revenue during the run-up to Christmas could outsource its recruitment during this time to allow it to focus on other business operations during the busiest period of the year.

Another benefit of choosing an FSO is that these firms will have specialist experience in franchising, which means they’ll understand all the nuances of franchise recruitment. Other recruiters may not be so familiar with this sector or the type of candidates franchisors are looking for.

Furthermore, an FSO can provide you with the best talent in your area at a much lower cost than a full-time salesperson. However, whether they find the right people for the job will depend on how much demand there is for the types of positions you’re filling. Also, you’ll still have to approve the candidate and check that they satisfy all the job requirements.

Our best tips for buying franchises

So far, we’ve mainly focused on selling franchises. But what about buying them? Here is some more information about investing in a franchise:

Consider a franchise resale

If you’re planning to buy into a business that is already well established, you’ll benefit even further from acquiring a specific franchise unit that already has staff, cash flow, customers, suppliers and profitability. With franchise resales, you should already have all this in place, which greatly reduces the risk of the business failing.

Unsurprisingly, it will be more expensive for you to buy a franchise for resale, as the business may be already profitable and poised for further growth. But this doesn’t mean it’s poor value for money.

Most franchise sales are resales

Research from the 2015 BFA-NatWest Survey of UK franchising revealed that more than two thirds of franchises acquired within the two years leading up to the study had already been operating before they were acquired.

This demonstrates that many franchisees are attracted to the idea of buying a business that already has a strong brand identity, staff, customer base, cash flow and financial data to look back on. With franchise resales, you don’t have to worry about establishing the brand in your territory and plans are already in place for future growth.

Why do franchises sell their businesses?

Often, franchisees will sell their business if they want to move onto something different in another sector, or if they’re looking for a big lump sum to fund another business venture or their retirement. Alternatively, the franchisee may be planning to move to another location or may have had an exit strategy to sell their franchise at a particular point in time, such as at the end of the franchise contract.

The franchise territory

When you buy a franchise resale, you’ll receive a licence to operate within the franchise territory. Some franchisees may operate in an exclusive territory, which means their franchisor can’t set up other franchises within the specified geographical area. This is ideal, as you’ll face less competition, helping you consolidate your customer base and continue growing without competition from franchisees of the same brand.

Don’t underestimate the risks

You need to consider the possibility that a franchisee might be selling their business because it hasn’t performed as well as they expected, or because they haven’t had a good relationship with their franchisor.

Therefore, one of the first things you should do is determine whether the asking price is reasonable. It should be based on the level of franchise development and whether the business is profitable. You can get a professional business valuation from an accountant, who will provide a comparative value that will help you identify whether the asking price is too high.

Look at the franchisee’s track record

Look at the franchisee’s trading history so you can understand how well the business’ products or services have been selling and whether the business model as a whole really works. If it does, it may be easier for you to secure funding for a franchise resale, as the business will already have a good track record of paying back any previous loans that the franchisee took on when starting the business.

Find out how much training and support the franchisee received

If the franchise is not performing well, it could be because of a lack of training and support from the head office. Therefore, if it turns out the franchise doesn’t have the right support structure in place, it will be harder for the business to sustain sales and generate profits when you’re on board.

As always, don’t hesitate to get independent legal advice if you’re unsure of anything when you’re planning franchise sales or resales.

If you’re a franchisee, talk to your franchisor

If you’re selling your franchise business, always keep your franchisor informed, as this is a contractual obligation. Remember that franchisors have the right to reject prospective franchisees if they consider them to be unsuitable for the network. Clear, regular communication between both parties will ensure that the transferral of ownership is as smooth as possible, so the new franchisee can get their business off to the best start.

Source: Pointfranchise

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