Franchise Brokers
Franchise brokers may call themselves business coaches, advisors, referral sources, or sales consultants. They often advertise on the internet and in business magazines, offering to help you select among various franchise options.
Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources. A broker also may help you finish applications and the paperwork to complete the sale. Brokers often work for franchisors and are paid only if a sale is made.
Before you decide to use a broker, consider whether you need a broker’s services or could get enough information by shopping online or reading trade magazines. In evaluating whether to use a broker, and if so, which broker, the Federal Trade Commission (FTC) offers the following information and guidance.
What choices does the broker offer?
Some franchise brokers may claim to be able to match you with the perfect opportunity because they represent a wide range of business sellers. That may be true—or not.
Ask how many franchisors the broker represents. A broker who represents only a few franchisors will give you limited suggestions.
How does the broker select franchises?
Some franchise brokers may claim they will suggest only those franchises that meet certain standards. You may think this means that your risk is limited because the broker weeds out poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. A broker who does that might direct you to a franchisor that is failing or doesn’t have a strong history.
Ask how the broker selects franchisors to represent. Ask to see the selection criteria and how many franchisors the broker has recently turned down.
How is the broker paid?
Some brokers earn a flat fee regardless of the price of the franchise they sell. Others earn a commission based on the cost of the franchise. These brokers may steer you toward a more costly franchise to increase their commission.
Ask who pays the broker and how the payment is calculated. Find out whether the broker earns a commission based on the cost of the franchise. If the broker earns a commission based on the cost of the franchise, consider whether the broker is suggesting a higher priced franchise in order to earn a larger commission.
Are the broker’s earnings claims reliable?
To convince you to buy a particular franchise, a broker may talk about how much money you can make. These claims may not be true or can be misleading. For example, the figures may be based on earnings in an area where there is high demand for the franchisor’s goods or services. Or the claim may be based on outdated industry data. In some instances, earnings claims may use gross sales figures, but when you consider likely expenses, you may find that actual earnings will be far less.
Because earnings representations may be misleading, franchisors usually don’t allow their sales representatives to make claims about sales, income or profits unless the claims are included in the franchise disclosures the franchisor must give you.
The required franchise disclosures will list the names and contact information for the franchisor’s current and former franchisees. Talk to them, rather than relying on information from the broker alone. Ask about their experience with the franchisor.
In Rhode Island, franchise brokers, who may also be known as business coaches, advisors, referral sources, or sales consultants, are not governed by specific state statutes that are unique to franchise brokerage. However, they are subject to general business and contract laws that apply to business transactions within the state. Additionally, franchise brokers and the sale of franchises are regulated at the federal level by the Federal Trade Commission (FTC) through the FTC Franchise Rule. This rule requires franchisors to provide potential franchisees with a Franchise Disclosure Document (FDD) at least 14 days before any agreement is signed or any payment is made. The FDD includes information about the franchisor, the franchise business, the terms of the franchise agreement, and contact information for current and former franchisees. Prospective franchisees are encouraged to use this information to perform due diligence and to contact current and former franchisees to validate any earnings claims or representations made by the broker. It is important for individuals considering using the services of a franchise broker in Rhode Island to inquire about the broker's selection process for franchisors, how they are compensated, and the reliability of any earnings claims they make. As always, it is advisable to consult with an attorney who is knowledgeable in franchise law before making any franchise investment decisions.
