SHOULD YOU USE A THIRD PARTY FOR THE SALE OF FRANCHISES?

  • -

SHOULD YOU USE A THIRD PARTY FOR THE SALE OF FRANCHISES?

With more than 3,500 active franchisors encompassing over 75 different industries, how can franchise companies compete for new franchisees? The very essence of this question may explain why one of the fastest evolving areas in franchising has been that of franchise sales.

Although many franchise companies still use an in-house sales department or the traditional franchise broker, the recent trend has been to employ several different combinations, including area representatives, development agents, franchise lead referral networks, business brokers and franchise consultants. These third party intercessors provide relief for some franchisors and total frustration for others.

Frustration because of the cost of familiarizing third parties with a franchisor’s particular system and the increased compliance cost to manage a sales process in which third parties are a major part of a franchisor’s plan for adding new franchisees to its system. Keep in mind that the third party intercessor is usually compensated by the number of leads generated or on franchises actually sold. Thus, some third party intercessors merely focus on generating leads – quantity with no responsibility for quality. Obviously this process of generating leads fails to adhere to a franchisors usual qualification process hopefully designed to analyze whether a prospect is likely to be a good long term fit in the franchise system. Over time, a bad fit will in all probability result in failure. Not only does a failing franchisee cost a franchisor significantly more time and energy trying to make the poor fit franchisee successful but when new prospects talk with the failing franchisee that new prospect will very likely not buy or at least be discouraged from buying a franchise. In addition, a poor fit often breeds legal battles that require a significant diversion of personnel and financial resources.

Before choosing a third party company to assist with aiding in the franchise sales process, carefully look at the qualifications of the third party. Obtain a copy of their client list and when appropriate, interview their clients. Franchisors should also follow the golden rule in franchising – communication is the key to a company’s success, the lack of communication is an interstate to litigation. It is incumbent upon franchise companies to develop a franchise sales compliance program. Make a summary of the program and incorporate it in your contract with the third party company assisting you. Make sure your compliance summary includes rules, procedures, processes and the training program provided to the third party. Franchisors must be cognizant that the use of third parties to generate leads or sell franchises creates inherent conflicts. Because you pay for leads or pay a commission on sales, the third party becomes focused on the number of leads whether they are quality leads or not. Furthermore, a third party selling franchises has no skin in the game – the natural tendency is not to care about the franchisor’s long term relationship with a franchisee.

The franchise sales process can be a franchise company’s life line or its anchor. The result depends upon how a franchisor approaches franchise sales. In next month’s Franchisor Alert we will review the advantages and disadvantages of different approaches to selling franchises.


  • -

RECRUITING NEW FRANCHISEES

Looking for additional ideas to grow and build your franchise system? One idea to reach your magic goal is finding individuals who are already in your type of business. I am not referring to conversion franchising, although for some franchising companies this method has proven quite successful. Of course, the down side to conversion franchising is that the converted facility has to be reformatted to your trade dress, and the prospective franchisee normally has a closed mind to a different system of doing business. In many cases, if we really analyzed conversion franchising, we would find that if the individual in business were successful, they normally would not be interested in converting.  Since conversion franchising may not be the most beneficial way to obtain franchisees, other means of prospecting should be explored.

Perhaps a more successful means of obtaining prospective franchisees is to look for a person that has worked for some other company in the same or similar business and now wants to have their own business. This concept is really not new; it has been used in many other areas. When my favorite college, Auburn University, hired a new football coach, he found the program lacked the quality athlete for the football program to be competitive. To build the program he used the traditional approach of recruiting from high school. He also recruited Junior College players. This last step put the booster rockets on the program and helped it climb back to the top as one of the elite football schools. This coach in essence did what we are talking about. He found a prospect who had worked in a similar line of
business (Junior College) to be his franchisee. The chances that the new athlete (franchisee) would be successful were greatly enhanced because of the athlete’s previous experience.

One of my clients tried this concept of recruiting prospective franchisees from the same or similar business by giving a discount on the initial franchise fee based upon the number of years experience the prospect had in its type of business.  They not only increased the number of franchises sold but the success rate for these franchises was much greater and thus, their bottom line increased.

There are all kinds of wrinkles but the idea is to generate a new way of adding numbers to your system. Because the prospect already has had experience in a similar business they will not require the extensive training of someone with no knowledge of your business. The likelihood of the prospect’s success is also much greater since the learning curb will not normally be nearly so great. Further you are now marketing to attract a particular segment and your dollars are much better spent to reach those individuals most likely to choose your industry.

There are a number of avenues to target prospects in a particular market. Give us a call if we share any ideas or consult with you on a particular need you may have.