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Brokers, Consultants & Attorneys - Oh My!

RECAP: In my last post, our Franchisee had just begun to explore the wonderful world of franchise brokers (aka consultants), and was on the verge of discovering that there are actually several "flavors" of consultants available in the marketplace.  

Our Franchisor, on the other hand, had discovered that introspection is the name of the game when it comes to deciding whether or not to franchise a concept, and he was well on his way to discovering a few "flavors" of his own.  In the case of our Franchisor, however, we're talking about the spectrum of options available to actually construct a franchise system.  

FRANCHISEE

Now that I have a better grasp of the "franchise broker" vs. "franchise consultant" controversy, I'm going to delve a bit deeper into the franchise broker end of things to see what I can find.  Based on my research, it appears that franchise brokers come in multiple flavors:

On one end of the spectrum we have franchise brokers that work on a fee-for-service (non-commission) basis, and are not associated with any specific brand or organization.  In other words, they are in business by, and for themselves.  These brokers charge a fee for helping a client to determine which franchise opportunities are most suitable, and do not receive a commission from the franchisor for their services.  These brokers are typically known as “independents.”

On the plus side of the independent broker equation, these brokers:

  • Are free to select from ANY franchise opportunity, not just the relatively small number of options provided by a typical broker.  
  • Are much less likely to be biased in favor of a specific concept because their compensation is not tied to a sales commission.
  • Generally must be VERY knowledgeable about not just franchise sales, but also all aspects of franchise operations in order to compete with the vast marketing and branding resources of the larger commission-based consulting firms.  In other words, these consultants can’t possibly compete head-to-head from a monetary standpoint, so they must rely on their skill and experience to add value to the equation.

On the minus side of the independent broker equation, these brokers:

  • Are few and far between (the vast majority of brokers work on a commission basis).
  • Add a bit of additional cost to the initial franchise purchase, because their fees are paid in addition to the franchise fee charged by a franchisor. With a commissioned franchise broker, the broker’s fee is paid by the franchisor based on the funds collected for the initial franchise fee (typically), so in the typical broker scenario, the franchisee would only be obligated to pay the franchise fee.
  • May not have access to the tools, training and products available to a commissioned broker working for a large firm, as the larger firms are generally able to provide significant economies of scale and resources that are simply out of reach for smaller organizations.

On the other end of the spectrum, we have the larger, more traditional, commission-based brokerage organizations.  These firms do not typically charge their clients (aka candidates) a fee for their services, because they are compensated by the franchisors they represent in the form of a commission for each franchise sold.  These brokers work exclusively for these brokerage brands, and represent themselves as such. 

On the plus side of this arrangement, these brokers:

  • Often have access to a plethora of sophisticated client management tools and programs.
  • Provide initial and ongoing training, based on programs designed and delivered by experienced franchise development (sales) professionals.
  • Provide conferences and various opportunities to mix and mingle with fellow franchise brokers.
  • May have a strong brand identity and access to sophisticated marketing and advertising tools and technology in both the digital and traditional spheres.  Online programs often include robust programs such as Pay-Per-Click (PPC), Search Engine Optimization (SEO), Display Advertising (banners), websites, etc. Traditional advertising generally includes programs such as ads in trade magazines, professionally designed brochures and pamphlets, high-end trade show booths and much more.
  • Have access to legal services, which help to ensure strict compliance with state and federal laws, which is a significant issue in the world of franchising.
  • Provide access to franchise opportunities that have been thoroughly screened and hand-picked by the firm.*

*EDITOR’S NOTE: This claim has also been somewhat controversial, in that some insist that most brokers only select franchise concepts that they know they can sell, and that are willing to pay the highest broker commissions.  

On the minus side of this arrangement, these brokers:

  • May only represent 100-300 franchisors, which equates to less than 10% of the total universe of available franchise opportunities.
  • Are far more likely than pure fee-for-service (non-commissioned) brokers to steer clients toward the concepts and/or specific franchisors that pay the highest commissions (they may be more biased).
  • Often have part-time brokers that do not work in the franchising industry on a full-time basis.  These brokers may be significantly less knowledgeable than an individual that is working as a full-time broker.

EDITOR’S NOTE: Some of the less reputable franchise brokerage organizations have been known to advertise the franchise broker franchising opportunity by using such messages (tactics) as:

  • Become an entrepreneur!
  • Professional training provided
  • Executive-level income potential
  • Work part-time or full-time
  • One-time fee
  • Etc.

In an interesting twist, some franchise brokerages have themselves become franchisors, which means that the franchise broker role is packaged and sold as a franchise. 

And in the middle of the spectrum, we have independent franchise brokers that have banded together to form associations in order to leverage the best of both the independent (pure fee-for-service) and the commission-based brokerage (aka consultant) models.  I the association model, the association does not charge royalties or share in the commissions of their members.  Rather, members pay monthly dues to support the organization.  


FRANCHISOR

So let's see what's available for someone like me who's looking to franchise their concept.  

Based on all the homework I've done, I know that I will need to create a number of key documents in order to franchise my business.  These documents include (but are not limited to):

  • The Franchise Disclosure Document (FDD) - Required by law and describes the relationship between the franchisor and the franchisee.
  • The Franchise Agreement - Required by law and governs the relationship (a written contract).
  • The formation of a business entity (the corporate franchise structure and all related filings and documentation).
  • The preparation of trademark, copyright and business patent applications.
  • The preparation of franchise registration applications for various states.
  • The development of an Operations Manual.
  • The development of collateral material and brochures.
  • The development of a Business System (Letterhead, business cards, etc.).
  • The creation and development of a website.

In the case of the franchisor; on one end of the spectrum we have the do-it-yourself (DIY) model, which is also commonly referred to as the "boot-strap" model.  In the purest sense of this model, these ultra-conservative individuals have concluded that they prefer to accomplish all of the above-listed tasks (and more) on their own - literally.  This would typically include downloading and customizing various sample documents directly from the web, such as the FDD, the Franchise Agreement and even the Operations Manual.  From everything I've read this is a VERY risky move which could easily end up costing many multiples of any money saved if things should go awry down the road.

A few rungs up the ladder from the DIY crowd, I've found a group of organizations commonly referred to as "franchise packagers."  These organizations tend to seek out inexperienced franchisors that are highly price sensitive and looking for a quick all-inclusive solution.  Many, if not all of the documents provided by these companies are essentially "boiler-plate" solutions, whereby the franchisor simply fills in the blanks.  Given the fact that there are literally hundreds of variables that a franchisor must consider when creating these all-important foundational documents (and the fact that no two franchise systems are exactly alike), this is a highly risky strategy which, just like the DIY model, will likely end up costing much more in the long run.

As we continue our journey along the spectrum, the next stop brings us to the land of the franchise attorney.  Please notice that I say, "franchise attorney" because franchising is a very specialized field, and an experienced franchising attorney is an absolute must.  If you want to let your cousin Vinny handle your divorce that's certainly your prerogative, but don't let him anywhere near your franchise.  

On the plus side of the franchise attorney equation, from what I've found, many attorneys are very skilled at drafting franchise documents, and many do a very solid job of protecting the interests of the franchisor and covering all of the legal bases.  

On the minus side of the franchise attorney equation: 

1) Some attorneys tend to look at franchising strictly from a legal perspective, and as such, the documents they draft may not incorporate some of the more subtle nuances of a particular franchise concept.  Although the trend lately in many franchises has been to lean toward a more colloquial, reader-friendly "voice" in their documents, most franchising documents still tend to read like a legal treatise.  

2) Many attorneys only specialize in the drafting of the "core" legal documents (such as the Franchise Disclosure Document and Franchise Agreement), and as such, they would not draft any of the other critical documents such as the Operations and/or Training Manuals.  In these cases, the creation of the other documents would need to be outsourced, which would mean more work (and potentially cost) for the franchisor with regard to coordinating the creation and review of all of the documents.

3) Experienced franchising attorneys can be very expensive, so knowing and understanding their fee structure is critically important.


In addition to franchise attorneys, this general section of the spectrum also includes organizations that specialize in drafting key manuals and related materials, which may include (but are no limited to):

  • An Operations Manual
  • A Marketing Manual
  • A Sales and Compliance Manual
  • A Field Consultant Manual
  • A Training Manual
  • And quite a few more as applicable
While some of these organizations are essentially "manual packagers," that operate in much the same manner as a "franchise packager" (i.e. they use boiler-plate, fill-in-the-blank" manual templates); the higher end companies will essentially write each manual from scratch.  The costs for creating these manuals can vary dramatically depending on the amount of boiler-plate vs. custom work, so it's critical to know exactly what you're getting for your money. 

At the top of the food chain (so to speak), are what I like to call the "mega consulting firms."  These firms, which have typically been around for at least a dozen years or more, are essentially a one-stop-shop for everything a new franchisor could ever want or need.  These firms are very well connected in the franchising world, and have solid reputations for providing top-notch advice.  In addition, many of these firms can afford to hire very experienced individuals, or in some cases even entire departments, that specialize in various franchising disciplines (legal, operations, marketing, etc.). Those mega consulting firms that do not have large in-house teams often sub-contract their work to various well-known franchising professionals, and essentially serve as the "quarterback" for the coordination of all services.  

On the plus side of the mega consulting firm equation:

1) These firms may save a significant amount of time, energy and potentially money, that might otherwise be spent on piecing together each element of the franchising puzzle.

2) They may also bring a level of credibility and expertise that is difficult to find - especially for the uninitiated novice.

3) Based on their many years in business, these firms have developed key contacts and working relationships with with organizations in virtually every facet of the franchise universe including (but not limited to): software, finance, real estate, supply chain, product fulfillment and much more.

On the minus side of the mega consulting firms equation:

1) These firms are generally not inexpensive, and the vast majority will require a significant commitment of both time and money in the form a formal Agreement/Contract.

2) Many of these firms have negotiated special commission and/or referral fee arrangements with the vendors they refer, so their referrals may not come without a certain bias.  

Your best bet with these mega consulting firms is to look for an organization with solid industry credentials and an established history of working with successful franchising organizations.  As always, you should ask for referrals and don't be afraid to discuss their fee structure in detail.

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