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The Secrets Franchise Brokers Won't Tell You

Shhhh. While some franchise brokers would prefer these things go unsaid, transparency is essential in ensuring prospective franchisees make the right decision about their future.

The world of franchise brokering is filled with intricacies and nuances that potential franchisees might not initially consider. When embarking on the journey to purchase a franchise, the advice and guidance of a broker can be invaluable. However, as with any industry, there are secrets and undisclosed practices within the broker world that can significantly impact an entrepreneur's decision-making process. 

The Bias of Brokers

It’s important to keep in mind that brokers are often paid through commissions, which means they’re more likely to present franchise opportunities that offer them larger financial incentives, regardless of whether those opportunities are the best fit for the potential franchisee. 

"A lot of brokers are going after a big check, not a good success story for their client," Kenny Rose, CFE, founder of FranShares, told 1851 Franchise. “It is great to use a broker to understand what is out there, but remember that brokers are biased. If a brand costs more and provides less commission, you won’t see it.”

Similarly, while it is common knowledge that brokers are compensated by franchisors through a portion of the franchise fee, the exact amount and the potential impact of this compensation on the broker's recommendations are rarely discussed openly. 

“Brokers usually disclose how they are paid, but they don’t talk about how much they are getting paid,” Chuck McKinney, principal at Franchise Connection Partners, told 1851. “In the senior care industry, for example, some franchisors pay industry standard — about $24,000 per placement — but some franchisors pay almost twice that much. Why? They are trying to buy a bigger share of the marketplace since it is so popular right now.” 

Brokers may also encourage candidates to consider larger franchise packages, such as three packs, five packs, ten packs or even twenty packs. This is because when the total cost of the franchise investment increases, their commissions also rise.

McKinney says recognizing and understanding these financial motivations can help build trust between the broker and the franchisee.

“There are some brokers who discuss the commissions they are getting, and others who don’t,” said McKinney. “I am always willing to tell people how much I am going to get paid. If you want to ask me, I'll tell you. I know why I am presenting this brand to you, and it's not just about the paycheck.” 

Presenting Limited Options

Since many brokers don’t disclose the full range of franchises they are affiliated with, nor the specifics of their referral agreements, candidates can find themselves presented with a severely limited pool of options.

“When it comes to the options brokers will show you, it sometimes starts and ends with the ones they have an association with,” McKinney said. “Let's say there are 4,000 franchise concepts out there in total. Broker associations often only have relationships with 400 to 500. So, that means candidates are only seeing 10% to 15% of the whole universe. Think of it this way — if you went to a real estate company, and they were only allowed to show houses that they had listed themselves, instead of the whole MLS, that would be a big issue.”

That is why it is important to find franchise brokers who prioritize transparency and are willing to answer those tough questions, McKinney noted. 

“A candidate might be interested in something that I don’t get paid for, but if I can help you get to a good outcome, you’ll help me down the road with referrals and recommendations,” he said. “It’ll even out over time. That is why our organization now assesses all franchises, not just ones that we have relationships with.”

The Value of Owner-Operators

Another secret that franchise brokers may not want to talk about, Rose said, is that franchisors’ preferences are changing. Right now, many franchisors prefer owner-operators who are going to be deeply invested in the success of their business, rather than absentee investors who are looking to add to their portfolios without direct involvement. 

This trend is largely due to the fact that there are more options than ever available to fund franchise businesses, from crowdfunding platforms to Home Equity Lines of Credit, which means financial qualification is no longer the only consideration for franchisors.

“Millionaires are always harder to find, and that is why brokers exist — they help franchisors find those financially-qualified candidates,” said Rose. “But if all of your franchise owners are millionaires, they probably aren’t going to work as hard as the owner-operators who are excited and hungry and are not going to sleep until they are a success. Since millionaires are no longer the only ones who can afford to start a franchise, many franchisors would prefer owner-operators, but brokers might not always tell you that.”

Why Transparency Matters

In an ideal world, all franchise brokers would prioritize transparency, honesty and the genuine success of franchisees, but that is not always the case. That is why it is important for prospective franchisees to do their due diligence and ensure they are partnering with a broker who understands their aspirations and is committed to guiding them through the intricacies of the franchise selection process with integrity.

1851 Growth Club, for example, is a brokerage that was created to solve these common issues by promoting ongoing transparency and education for all stakeholders in the realm of franchising. Growth Club has capped broker commissions at $20,000 to provide more clarity to franchisees about the costs involved in the process.

For more information on franchise brokers, check out these related 1851 articles and resources: