Franchise brokers refer to themselves as “business coaches,”“advisors,”“referral sources,” or “sales consultants”—help people who want to buy a franchise. They often advertise on the Internet and in business magazines that they will help you select among various franchise options.Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources.A broker also may help you complete applications and the paperwork to consummate the sale. Remember that franchise brokers often work for franchisors, and get paid only if a sale is completed.
Limited Opportunities - Some franchise brokers may claim to be able to match you with “the perfect opportunity” because they represent a wide range of business sellers. That may be true—or not. In some instances, franchise brokers represent only a few franchisors, and, as a result, their suggestions may be limited.
Selection Standards - Some franchise brokers may claim that they will suggest only those franchises that meet certain standards. You may think this means that your financial risk is limited because the broker is weeding out the poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. If you rely on a broker, be skeptical: you may be directed to a franchise that is failing or that doesn’t have a track record.
Upselling - Some brokers earn a flat fee regardless of the price of the franchise they sell; others earn a commission pegged to the price of the franchise the broker sells. The more costly the franchise, the bigger the broker’s commission. Some brokers may steer you toward a more costly franchise to beef up their own commission.
Unauthorized or Misleading Earnings Representations - To convince you to buy a particular franchise, a broker may make certain representations about income. Earnings claims may not be true, and sometimes, can be misleading even if literally true. For example, the figures may be based on earnings in an area where demand for the business’ goods or services is high. Or the earnings claimed may be based on outdated industry data. In some instances, earnings claims may be gross sales figures: when you factor in likely expenses, actual earnings can be far less. Because earnings representations may be misleading, many franchisors prohibit their sales representatives from making them.
Before using a franchise broker, ask yourself:
- whether you need the services of a franchise broker. Can you get enough information shopping online or reading trade magazines?
- whether the broker is paid by the franchisor. Are there any fees you must pay the broker? If so, how much you are willing to pay?
- whether the broker’s commission depends on the price of the franchise. If it does, consider the fact that the broker may be leading you toward a higher-priced franchise. Ask about alternatives in the same field that may cost less.
- how many franchisors the broker represents. If it’s a small group, the potential match-ups may be limited.
- how the broker selects franchisors to represent. Are the selection criteria in writing? Ask to see them. How many franchisors has the broker turned down in the recent past?
- about potential earnings claims. Verify whether the franchisor has authorized the claims. Ask the franchisor for the written documentation that lays out the basis for the claims. Think about consulting an accountant to determine whether the claims are reasonable and if they are applicable to where and how you intend to operate your business.