Franchise Sales Strategies Are Failing. Total Transparency Is the Only Way Forward.

The traditional franchise sales model is failing. Brands prioritize short-term success in the form of unit signings and franchise fee collections. Bloated — and undisclosed — broker fees leave them low on funds to support the small business owners they’ve just signed. Development teams accept sweeping industry averages, like a $13,000 cost per lead or a 1% deal-to-lead rate, rather than looking at the reality of their own system and examining the operational factors that could be influencing franchisee interest. Closing a deal has become the goal, not signing, onboarding and supporting a right-fit owner who will truly be successful in the system, and this pushes a lack of transparency that harms the entire industry. While a recent FTC settlement may represent some movement in the right direction, the industry at large needs a reset.

“We’ve got to be willing to get honest, even if that means a headline or news gets out that isn’t pretty,” Art Coley, CEO of CGI Franchise and the ROS Framework, said on a recent episode of the Meet the Franchise podcast. “Those behaviors unfortunately happen too much in the industry, and that in itself is an injustice because franchising is beautiful. It's the greatest invention, in my opinion, for small business ownership.”

Coley is the creator of the Recruitment Operating System®, a framework developed to help franchisors optimize their own development efforts rather than relying on broker networks or lead generation agencies. With over 30 years of experience in the franchise industry, Coley bases his strategies on one enduring principle: a great business model is only as strong as the recruitment system behind it.

A strong recruitment system, though, must have the right priorities. Coley advocates for transparency, attention to unit-level profitability and recruitment strategies that are aligned with long-term franchisee success.

“At ROS, we'll talk with any brand. We will even tie our compensation to the performance of your franchisees over five, 10 or 15 years,” Coley said. “We aren't brokers or an FSO. Think of us as the franchisor to your franchise development. We provide manual systems and analytics for lead generation, appointment setting, sales and onboarding through 36 months. Our model is focused on scalability, durability and wealth generation for franchisors and franchisees.”

Reclaiming the potential of the industry requires development leaders to confront the uncomfortable realities of how franchising has changed, from hidden broker kickbacks to financial models that make ownership increasingly inaccessible for hopeful entrepreneurs. Coley highlights that more people than ever are actively choosing franchising, and there are still many franchisors who truly care about the success of their franchisees.

“We have a proven system that works, and we can show any franchisor the data,” he said. “Personally, I feel like I'm finally getting the opportunity to make meaningful changes in our industry, which is very fulfilling.”

Coley joined 1851 Franchise Publisher Nick Powills to discuss industry benchmarks, capital influence, the current state of development channels, and what it will take to bring the industry back to the supportive, small-business-owner-focused model that early franchisors envisioned. A transcript of Coley’s interview with Powills has been provided below. It has been edited for brevity, clarity and style.

Nick Powills: We'll get into what your business is and everything that's going on with you. But I'm going to kick off with a statement, because I think it'll create a good discussion.

I hear everybody coming back from the Franchise Development Conference, and I keep on hearing the numbers: "The cost per deal is $13,000, and the cost per lead is this." I hear this stuff, and I start getting frustrated by it. Why are we using these benchmark numbers when the truth is it's always going to be specific to the brand?

Unit-level economics are king. If you can't make money, you can't get a payback on your initial investment, or if it takes a long time, it's going to be harder to sell franchises. The brokers have already disrupted everything. They're capturing all the leads. So I hear these data points, and then I talk with franchisors that are using it as a reference point, and I get irritated by it, because I'm like, "Why don't we just look at your specific data?"

When you hear industry data, or you're looking at or talking to a franchisor that has false expectations with upside-down unit-level economics, how does it make you feel?

Art Coley: It hurts. The industry data stuff in franchising, it reminds me of that phrase, "The road to hell is paved with good intentions." I don’t mean that in a sarcastic or humorous spirit; I'm serious. I think people in our industry are trying to offer help.

People are intending or trying to get real information.

A lot of times, what happens is people start really vomiting from the mouth, and that ends up turning into just mistaken beliefs, false beliefs, unknowingly and all.

Most of the time, I really do believe it's unintentional. But that, in many ways, is the result of people not really knowing even their own data and being hungry for just anybody that comes along that can offer you some kind of nugget or inspiration to help you have what you think is a baseline or a milestone or some kind of KPI.

Nobody's stopping to say, "Okay, what's the basis of that? Where does that come from?" We just hear something in our industry, and we're often guilty of just adopting it. One of them, Nick, is the old thing about the 1% rule. I heard that for years going to conferences: “If you get about 100 leads, you'll sign one of them, and if you get 1,000, you should be signing about 10.” It still is out there. It's out there a lot less today because enough franchise owners are saying, "Wait a minute," but we know that the industry average now is 25 basis points, maybe 50.

So then you're talking now 200 to 400 leads for one signing. Guess what? If you're building your whole recruitment program, and I'm just talking about signings, never mind if they're the right people and qualified, I'm just talking about pure production of signed franchise agreements.

If you're building your whole platform and thinking that, okay, if I'm at the industry average, and you just kind of should show up, should be signing one out of a hundred, and the real number for you might be one out of six hundred, you've got a problem. You've got a problem. And unfortunately, this is the reason why ROS exists.

It's an unfortunate thing, because if all of that wasn't there, we probably wouldn't have a business. And the truth is, my business is at record sales. We've got more brands wanting to work with us than we will take on. Again, I'm not storytelling; I'm not pontificating or anything.

I'm just talking about the truth. And the truth is that's because they need help.

Powills: I was watching a video on Tony Robbins, so I'm not going to say the line without giving him credit for this, but he was talking about how reachable happiness is, and happiness is reachable when expectations are aligned; it's really that simple. You hit the expectations, you're happy. You don't hit expectations, you're unhappy. 

So I think about franchisors that are even reaching out to you, franchise salespeople or executive leadership, saying, "We want more." Of course, every franchisor should want more. They're not wrong to want that. But it seems like expectations are just always misaligned because of that industry data, because of probably false pressures from CEOs that don't get it.

Are we looking at intelligence issues? Are we looking at unnecessary pressure issues? What is even creating this? Obviously it's good for your business, and it's good for ours, because we can create solutions to try to solve it, but is it intelligence? Is it expectations? Is it something else?

Coley: Backing up, Nick, in some isolated cases it can create some opportunities for businesses like yours and mine. But you and I would trade it in a heartbeat if we didn't have that case, because we're still going to get the business that we need. People still need help, even if all the data and baselines are right.

But it's bad for the industry, because what we end up doing is we start selling versus recruiting. Nobody ever disagrees with this: the value to franchise recruitment and franchise development isn't about signing franchise agreements and getting units opened.

It's about building successful businesses. Private equity isn't making an investment in this, and investors aren't coming to the table for that. Founders never started a franchise company because they said, "Man, let's just go out and sign 20. If we can go out and sign 100 franchise agreements, it'll be gold."

They never said that. They always say, "If we can go get 100 units going, and they're averaging $3 million a unit and we've got $300 million in systemwide sales, and we're generating $20 million or $25 million of royalty, and we can generate that at a 40% EBITDA," the math doesn't work without successful business units.

I've been in franchising 30-plus years. Today, IFA reports there are about 850,000 to 860,000 franchised units in the U.S. That number wasn't too much different 20 years ago. Franchising is supposed to be a model for giving you a better chance of succeeding as a small business owner. But why is it that the number of small businesses in the U.S. keeps growing?

We're now over 30 million businesses in the U.S. I think that's the total number, Nick, even including Tesla and Apple. If that number keeps growing and getting larger, why doesn't the number of franchise units keep growing?

If you inflation-adjusted it to 20 and 30 years ago, I'm not so sure that the number isn't less. If you really think about it, we're just talking about the number of units opened. What is the total number of units that have been signed and opened or unopened? What is that net number? It might be sobering.

And really, as an industry, it's easier... I'm coming back to your question about why some of that stuff exists.

My dad passed in December '23, so I'm not breaking his anonymity here, if anybody knows anything about the rules of 12-step programs. When my dad passed, he had over 43 years of sobriety in AA. We all know the first step is that you have to admit there's a problem. Part of admitting there's a problem means you have to put it out on the table and look at it.

I'm not pointing the finger at anybody else, because when you point the finger at someone, there's a thumb and three fingers pointing back at you.

I'm part of that industry, and I'm not proud of this, but I can do my part today to change it. Maybe we can change it a little bit with this podcast today. But you have to be willing to look at it. You have to be willing to get honest, even if that means a headline or news gets out that isn't pretty.

We recently had a big legal thing against one of the franchise sales organizations come out. It's not pretty. A lot of times we want to say things to dismiss that or isolate it. But if we're really truth-telling, how many other people out there are acting that same way and just haven't been caught?

I think we would all probably agree they didn't happen to be the only ones doing it or showing up that way or going through that process. Whether the claims are true, they had their settlement and all that came after.

Those behaviors unfortunately happen too much in the industry, and that in itself is an injustice because franchising is beautiful. It's the greatest invention, in my opinion, for small business ownership.

Last thing on this piece… Success is getting what you want, but John Maxwell said this: "Success is getting what you want; happiness is liking what you get."

We could set goals for success to say, "I want to go sign 20 franchisees next year." That might check the box. We collected $50,000 times 20, collected a million dollars in initial fees. Maybe we spent $800,000 and got a $200,000 EBITDA contribution. Thumbs up, budget worked, franchise recruitment success.

Come back and ask me three years later, are we happy about those signings? Happiness is liking what you get.

Powills: All right. A few comments, and then just volley them back.

One: I had lunch with a friend of mine yesterday, and we have talks like this anytime we get together. It was very enjoyable. I said a few things. First, I said, "I would love to see a study done on the success of a franchisee who came through a portal, the success of a franchisee who came through a broker, and the success of a franchisee who came in organically because they were excited to join the brand."

He said something interesting. He said, "Sure, in most systems you can look at that." He goes, "In ours, we vet them all the same way. We're not going to let the brokers blacklist us for saying no to the wrong person that comes in."

I said, "That's great. So what's your bonus structure when in the first year their sales are overproducing average?"

He goes, "We don't get a bonus."

I go, "What about at year two? What about expansion?"

He's like, "We don't get a bonus."

I said, "All right. So if we're reshaping frandev, shouldn't the franchise business consultants or coaches report into frandev? What would happen then? What if they were actually the qualifiers at the beginning of the process? What if part of your comp structure was based on the success of a franchisee?"

So we started talking about this. My issue with franchise fees is that they all went up. Nobody's being honest about it, but they went up to pay the brokers more. Franchise fees were designed as the dollars it's going to cost to get that franchisee open and successful. That's long gone. That's no longer the operating capital.

You look at the lawsuit that came out, it's partly because the franchisor, after Fastlane takes their cut and the broker takes their cut, has no money left over to support the franchisee. So they were an undercapitalized franchisor. It wasn't an exercise in selling franchises; it was like, "Did we actually have the support mechanisms to support the franchisees?"

Which, if you really dive into that study and look at disclosures in Item 19, it's all there. But now let's go to the front end of that. You and I have talked about this before. If we go back to the day before we were in franchising and said, "Explain it," we couldn't, but we're expecting a candidate to know what franchising is on day one.

So I feel awful for all these franchisees who were sold. I say this stuff to get to my statement on your opening regarding the industry growing. We've eliminated bootstrapping. We're turning into an industry designed for investors, not for entrepreneurial mindsets, because the cost to get in is just too high. It's getting too aggressive.

Restaurants look at lights and fixtures and increase the cost, and I ask a restaurant, "What did it cost you to open up your first one?" They're like, "$200,000."

I go, "Now?"

They're like, "$2 million."

So we're out of the bootstrapping business to give people a chance. 

And then we get to the lack of transparency that exists in this industry. Nobody's transparent. The brokers are saying, "We coach for free." Bullshit. You get paid a significant amount of money; you just don't disclose it to them. The check from the franchisee goes to the franchisor, and the check goes to you right away. You are getting paid by this. Let's just be transparent about it.

There's no association that's actually protecting franchisees. We can act like there is, but there really isn't. Nobody wants to protect franchisees. We protect suppliers and franchisors that pay a crap ton of money into the association to play politics.

I say all these things because if we're ever going to be an industry that is really doing good... and there are plenty of brands that I think actually really believe in building wealth and changing projections for franchisees, but the only way we're going to change is if we can have honest conversations.

For whatever reason, everybody's afraid to do it because the money coming from the FSOs is too good, so we don't want to do that. The brokers are our lead engine, so we don't want to expose them. We don't want to expose franchisors because they're too big. 

It's going to take a few mighty people to start making transformations, but it's going to have to transform. Franchise sales needs to be eliminated; it needs to be franchise development. Operations, marketing, and sales need to be one department in the future because it all needs to be built around unit-level economics.

Whenever I hear a franchisor telling me that their existing franchisees aren't scaling anymore, that's because their expectations weren't met. They sign three-unit agreements, get unit one open, and can't perform at average, so they never open units two and three. Then we're in the business of selling franchises again.

That's why I love talking to you about this, because even if there are things we disagree on, we can have a conversation about how we get to the middle. I don't think that's happening as an industry. I don't think we're using industry events to help us get there and try to break through.

If we do, private equity funds are going to be much happier because after they buy, the realities will be the realities. If they buy now and pull over a rock, they're like, "Oh crap, look what's underneath there," because the realities aren't realities.

Coley: Love it. You trigger so many thoughts, Nick.

I was asked a number of years ago to participate and give some thoughts and feedback on preliminary perspectives regarding FSOs, broker groups, and what we might do in our industry. And I said, "Look, I think the first thing we ought to do is very simply require disclosure information."

If I'm an FSO, I should have to submit a disclosure document to any brand looking to sign on with me. Particularly, startup and emerging brands need help and consumer protection. There should be a disclosure document stating: here are the brands we've worked with, here are the leads that came in, here is what we produced, and here are the results those people produced in year one, year two, and year three as franchisees.

I think all that ought to be disclosed. Individual franchise brokers and broker groups should have to disclose their system as a whole. It's not too different from when multi-level marketing started being required to have disclosures. Broker groups should be disclosed, and individual brokers should have to submit disclosures too.

If I call up FranServe, IFPG, FranChoice, or The Entrepreneur's Source, they should have to show their disclosure information to me. The individual broker should have to show me their personal results too: how long they've been doing it and how many people they've been working with.

That way, all the cards are on the table. The broker doesn't represent every brand in the country. They aren't like real estate agents who can show you any house on the MLS. It's only the brands that have signed up and committed with them. If a broker is pitching me a brand because signing one more deal gets them and their spouse a trip to Hawaii, I should know that.

We all know if that disclosure were required, those things would probably go away immediately. But anyway, after I made those recommendations, my services were not asked for again. I was not officially invited to anything else. People know where I stand on that; I'm huge on transparency.

That's what I love about the franchise industry. We have the FDD. If a brand isn't doing an Item 19, and six other brands in that space all have an Item 19, that tells you something about the brand. Are their unit economics so good that they decided not to include it? I just want to know, good or bad. Let me see.

I'm not suggesting every franchisee in a system has to be a top 20% franchisee. The math doesn't work that way.

Here's something listeners can do right now for themselves, assuming they've been around long enough as a brand signing up franchisees. We've done this with brands where I've been CEO and brands we work with.

Go back five or 10 years. Take all the signings you've had and put them into three buckets:

1. Organic Bucket: Any source where candidates found you on their own. Most of the time it came through your website. Even if they saw you on a portal, in a commercial, or in a magazine, they went to your website and filled out a form.
2. Broker/FSO Bucket: Traditional broker networks and FSOs.
3. Referral/Brand Fan Bucket: A franchisee sent someone over, or a customer of your brand liked it and thought, "Maybe I can be a franchisee."

Take those three buckets from the last five to 10 years, look at all the people who signed, put them in one of the three buckets, and look at the results: sales and royalty generated. Look at what they produced for year one, year two, and year three. Assuming they went through the same sales process and onboarding, which group do you think produced the most ROI in terms of sales and profits for themselves and royalties for the franchisor?

Powills: Ranked one, two, three, it would be referral, website, broker.

Coley: Not even close. Referral is number one.

Does it change how you view that $40,000 you're paying for a broker lead if you know that? Not only did you pay $40,000, but statistically... now, this is based on my research, but there ought to be an industry-wide study on this. Everybody is hungry for better information to make better decisions.

Truth and transparency aren't always pretty, and they don't always serve everybody. At any brand where I've been CEO, I wanted to know that data.

At the CEO summit put on at FLDC, a speaker at the very end presented data around reputation. He showed that small business owners are some of the most trusted and respected people in our country. In local communities, small business owners ranked higher in trust than police, military, or clergy.

It makes sense. Small business owners are typically on the city council, on the chamber of commerce, or raising money for nonprofits. They care about the community because they live there.

Who was at the bottom of the trust list? The federal government, corporate America, and below that, private equity — or "money people." That doesn't make them bad, but that is the perception.

Something like 60% of the top 200 brands in Franchise Times are majority-controlled by private equity or money people. Franchising is built around small business ownership, yet now it's controlled by private equity. What a dilemma when trying to lobby in Washington, D.C., as a representative of small business when you're owned by Blackstone, BlackRock, or KKR.

How do you navigate that dynamic? I don't know the answer, but it's a tough spot.

Powills: When private equity explores buying a business, they rarely do deep due diligence with the franchisees. When private equity comes in, it doesn't mean anything positive for the franchisees who were the actual investors behind the brand. They don't get a percentage of ownership or an equity distribution when a buyer comes in; the founder walks away with the money.

It would take a total transformation for founders to say, "You're actually my investors," versus, "You're my franchisees."

We've eliminated "small business owner" from the message over time and started calling them franchisees, which hurts local viability.

Franchisors were almost given permission to treat a franchisee like an employee, but they aren't employees. They invest their life savings into it. They are small business owners.

To change this, it starts with the IFA. If brokers are the lowest performance metric, it starts with demanding transparency on broker networks so candidates enter with truth. The odds of the IFA doing this are slim to none, because broker networks and FSOs pay them too much money.

At conferences, the Multi-Unit Franchising Conference is the only one where franchisees actually show up. Nobody shows up at IFA because it isn't designed to support franchisees.

If we want to celebrate owner-operators who are the investors behind this, private equity can still exist. Buy out the founder. Maybe a founder disperses 20% of the buyout money to franchisees as a thank you. That's a long wish.

Money blocks every solution. Companies franchise people's businesses, take $100,000, say, "You're a franchise," and leave them stuck. Then they hire suppliers from IFA until things go wrong, and then they come to you or me to fix their problems.

The odds of franchising growing again under this model are slim because the money trail is too strong. We need a whistleblower.

Coley: Is franchising capitalism or socialism?

Powills: Great question. It’s probably the middle. Probably both.

Coley: Why is it probably both?

Powills: It's definitely capitalism because every aspect of it is designed to make money.

Coley: You invest, borrow money, or use your own money to open a business and generate a profit. Why would it be socialism?

Powills: Because you're deeply ingrained in communities and employees. Capitalism isn't the only form of equity in franchising, because lives are changing in many different areas.

Coley: I agree with you that it’s both. Take the top franchisees in your system versus a new franchisee. A new franchisee comes in: how much royalty are they generating? Zero. How much support do they need? A lot. The initial fee barely covers the cost to find, recruit and onboard them, especially after broker fees. So a new franchisee is high support, zero royalty.

Now fast-forward to your top 20% franchisees. They send barrels full of royalty and require much less support. The new franchisee side has no margin; it's a loss. The top franchisee side has margin.

This group is paying for that group. Taking money from top performers' royalties to support new franchisees is, by definition, a transfer of dollars. That is similar to public education, fire departments, or police departments — resources are pooled.

When a franchisor waives registration fees for new franchisees at an annual conference, existing successful franchisees are the ones paying for it.

We need to get away from word games and be truthful about our impact on small business ownership across different demographics. What if disclosure documents gave a breakdown of diversity, equity and inclusion? It's just a data point. If 92% of franchisees in a brand are male, that's important information for a female candidate to know during discovery.

I was CEO of a brand where almost 90% of franchisees were female. We talked about that openly with candidates so they could consider it in their evaluation.

Back in the 1970s, franchise leaders went to the FTC and asked the federal government to regulate the industry. Leaders like Bill Rosenberg (Dunkin') and Bud Hadfield (Kwik Kopy) asked for regulation because they wanted to be recognized as legitimate business builders. Franchise leaders created the outline for the FDD items, not the federal government.

Maybe we need to revisit those roots and double down on transparency again.

Powills: I was traveling with a client who did nine deals when their goal was 10 for the fiscal year. All units except one had real estate attached. They hadn't done nine deals in a year ever. Yet leadership asked, "Why are our leads down this week?"

I look at the economic impact — three years of royalties equals $200,000 per unit, a massive return on a $100,000 development budget. I feel bad for the salesperson who did a tremendous job bringing in transformational franchisees for a stalled system.

I don't know that I'm proud of the industry right now. I feel stuck. How are you feeling right now?

Coley: More people are choosing franchising as a career now rather than just stumbling into it. I stumbled into it in 1993 when I interviewed Bud Hadfield for a business magazine. It changed my life.

Today, I'm more excited than ever about franchising. I get to see the overall cycle. So many people fly to a discovery day seeking a better life for their family and financial independence.

Small business ownership makes that possible. The Wall Street Journal reported that 40% of the adult population is on its way to some version of small business ownership, including 1099 independent contractors. Fractional employment is going to have a massive impact.

If we support small business owners, we need policies that don't hurt them, such as healthcare access. People stay in corporate jobs because they're concerned about health insurance, which impacts innovation.

I believe there will be an awakening where people reclaim the importance of education, healthcare and small business ownership. Franchising is where all these things meet.

Powills: Franchising is life. It's people leveraging businesses to build better lives for their families.

Your business is doing really well right now. What is the secret to why you're doing so well?

Coley: We have a proven system that works, and we can show any franchisor the data. Personally, I feel like I'm finally getting the opportunity to make meaningful changes in our industry, which is very fulfilling.

Losing both my parents made me realize that time is precious. At ROS, we're going to keep speaking the truth and presenting data as it is. There are so many good franchisors out there who truly care about their franchisees winning.

At 56, having two grandkids helps give me happiness, serenity and gratitude. Approaching things with truthfulness gives me a chance to make a difference.

Powills: When you have perspective, you can educate franchisors on reality. It takes time to go from impression to inquiry. Candidates are climbing a mountain to become franchisees.

A successful franchisee pays much more over time and costs much less to support than an unsuccessful one. So when people talk about "cost per deal," who cares? If one candidate costs $100,000 to acquire but drops $10 million to the bottom line, and another costs $20,000 but drops $20,000, the scaling franchisee is worth far more.

I'm grateful for your perspective. Conversations like this reignite my passion.

Coley: Thank you, Nick. We're all conduits. Everything you're hearing from me was borrowed or learned from someone else, starting with my parents. My dad was a big believer in the Serenity Prayer: "God grant me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference." That solves a lot if you apply it.

At ROS, we'll talk with any brand. My cell phone number and email are on recruitwithros.com. We will even tie our compensation to the performance of your franchisees over five, 10 or 15 years.

We aren't brokers or an FSO. Think of us as the franchisor to your franchise development. We provide manual systems and analytics for lead generation, appointment setting, sales and onboarding through 36 months.

Our model is focused on scalability, durability and wealth generation for franchisors and franchisees.

Powills: You should be proud of everything you've done. When franchisors make mistakes with vendors, you come in and help them focus on unit-level economics. It's about working with someone who truly cares and looks at the specific needs of the brand.

Coley: I've seen how you approach lead generation. You ask the tough questions and do the work needed to generate qualified, meaningful candidates. Keep doing that. It's been an honor working with you. Anyone looking for marketing help should give Nick a call.

Powills: You said two things in a meeting recently that stuck with me. First, you said, "You're our last hope." I take that as a badge of honor and a responsibility to crack the code.

Second, at the end of a long meeting, you asked my team what their takeaway was. They stumbled at first because nobody had ever asked them that, but it gave them permission to have a voice and think about solutions. I've started using that method in my own meetings. Thank you for that.

Coley: Thanks, Nick. I borrowed that from someone else too.

Powills: This was a great conversation. I'm Nick Powills, and this is another episode of Meet the Franchise.

Watch the full conversation here.

Growing and selling franchises is difficult. Want to learn more about how 1851 helps franchisors grow their franchises with confidence? Visit www.1851growthclub.com and see what we can do for you.