Franchise consulting
'Franchise consulting' traditionally meant the same consultant-to-client relationship as any other industry wherein the consultant charges a 'fee for services'. But, as of the late 1990s the term 'consultant' was adopted by franchise salesmen and brokers that began representing themselves as "free" consultants to prospective franchise buyers. These 'free consultants' provide introduction services for franchise opportunity sellers with whom they have worked out a pay-for-sale agreement. Therefore, they are driven by the desire to connect the 'client' to a particular franchise.
There are still franchise consultants who charge clients for input whether the client desires advice on buying a franchise or assistance becoming a franchisor of their own (hopefully quality) business. Know the difference between a commissioned salesperson and a fee-for-service consultant.
Overview
BROKER VS. CONSULTANT - a struggle to be appreciated:
Especially since the Federal Trade Commission Franchise Rule on Franchising[1] changed the requirement that representatives of franchisors as salespeople disclose their past personal and professional history, there has been an onslaught of salespeople titling themselves 'consultants', and that includes several firms offering to train new members in as little as two weeks to become franchise experts prepared to advise new buyers as to the best opportunity in which to invest their available funds. Certainly there are competent 'franchise brokers' that understand the industry who can help advise buyers, but for the most part, a freshly minted broker (self-titled 'franchise consultant') is not equipped to assist a buyer with decisions concerning their entrepreneurial future.
The following is the way that some may describe the broker, or in their language, a consultant:
Much like a real estate agent, the franchise "recruitment consultant" typically charges no upfront fees to "buyers" (franchisees); instead, he or she receives the bulk of his or her income from "sellers" (franchisers) and thus operates as a biased conduit between the two. It is important to understand that franchisors do not employ franchise consultants, but they do employ franchise brokers who call themselves franchise consultants. They establish relationships with these franchise consulting firms. The role of the franchise consultant is to build a win-win relationship between the franchisor and the potential franchisee. Quality franchise consulting firms that have a large footprint in the franchising industry and help screen out the franchises that don't meet the high standards that are set by franchise experts.
Consultants' services are "free" to the potential buyer or franchisee only to the extent payment goes from the franchisee to the franchise company then into the brokers pocket, but these franchise brokers receive a substantial commission of up to 50% or more of the franchise fee the buyer pays to the franchise company. The potential buyer would pay exactly the same franchise fee as he or she would pay if they had contacted the same franchise on their own. It is illegal for the franchisor to charge anything additional for the use of a Franchise Consultant, unless this is disclosed in the Franchise Disclosure Document (FDD). So why would a franchisors work with franchise consultants? They do because franchise consultants screen out all of the under qualified candidates and only introduce to them highly screened quality candidates that fit their business model. Quality franchises are not concerned with paying the consultant a percentage of the initial franchise fee because they are looking at the long term residual value of on-going royalties from the franchisee. Of course, there are a substantial number of franchises that use franchise brokers (misleadingly called "franchise consultants") as a way to sell a large number of franchises in a network where maximizing franchise sales is paramount over franchise network survival.
There are many licensed attorneys who act as franchise consultants and who center their practices on their expertise in franchising and who will consult/represent the franchisee or the franchisor under a fee agreement. Attorneys cannot take fees from franchisors and consult with the franchisee at the same time because this would represent a conflict of interest for an attorney under state laws. A consultant package from an attorney will, of course, be expensive, but the attorney has the incentive and the duty under the law to "vet" the franchisor and perform "due diligence" on the offering on behalf of his/her client when he/she offers a consultant package to a client. It is critical to use a franchise attorney who also has an MBA, as this will ensure due diligence from both a legal and business perspective.
A few larger franchise consulting firms have branched out themselves, essentially "franchising" their franchise consulting businesses. And industry publications such as Franchise Business Review and Entrepreneur regularly quote high performing franchise consultants as reliable article sources. High performing franchise consultants are those who have a past performance record of providing quality matches for clients and a high success rate of their clients. But buyer beware applies - many of these highly touted franchise consultants represent franchise companies that have little, if any, name recognition.
In addition however, smaller and more pragmatic consultancy practices may work much closer with smaller businesses and work with them to franchise their business over time. This enables the business to begin franchising their business much sooner, often within 2 years of successful operation of a local model and for much less money - therefore risk, than using some of the larger consultancy practices. Franchise consultancies of this kind are often paid for by the franchisor not the franchisee - therefore mitigates risk on behalf of the franchisee of being sold something which is not necessarily "right for them" but rather gives the franchise consultants a nice commission.
Some franchise consultants also provide a great service for potential buyer by educating them on the franchise business opportunities, reviewing the data from the FDD and performing a due-diligence (complementing the work of a licensed attorney). Instead of working with a network of ~400 franchises like many franchise broker groups, these consultants often charge a flat fee upfront and can search for franchises that might not pay them a commission. Franchise consultants are a valuable advisor for the prospective franchise buyer.
A few franchise consultants solely specialize in helping foreign national investors gain U.S. residency through the purchase of a franchise. These firms specialize in finding and analyzing franchises that might be eligible for various visas including the E-2, L-1, EB-1C and EB-5 visas. It is always best to work alongside an experienced franchise consultant, immigration attorney and franchise attorney for foreigners planning to move to the U.S. through an E-2 visa franchise.
See also
References
- 16 CFR 437 and 437, Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities