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Should You Use A Third Party for The Sale of Franchises?

By January 18, 2017September 4th, 2018

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.

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