Changing Direction of Franchise Brokers

Part 2:  Broker Industry Becoming Fragmented

Writer's Comment:  Additional articles will address the fee structure of various brokerage firms, the shake out in the industry, and the franchise community's reaction and solutions to this controversial segment of franchising.

WASHINGTON, D.C. (Blue MauMau) - As the new Federal Trade Commission Rule became effective July 1, 2007, loosening regulations for franchise brokers, it also seemed to be triggering new activity among members of the industry. While some brokerage firms are now embracing a franchise business format model in turning consultants into franchisees, others are sticking to their original systems of keeping brokers independent. And at the same time, new referral networks are cropping up entering the Internet lead portal in chasing prospects, instead of sourcing franchisees through traditional networking strategies.

FTC Rule Changes Sparks Broker Reaction

Regarding the Rule changes for brokers, most feel they are important but not that significant. David Omholt, president of The Entrepreneur Authority, said he has mixed feelings about the changes specific to brokers. "I like that it will significantly reduce the administration time and expense for the referral networks, that's a good thing. But my only trepidation is that we may see some folks re-enter the broker ranks who were forced to retreat due to the old Item 2 requirement, whereby they had to leave because they had a checkered past." He explained that franchisors did not want to muddy the waters with litigation and bankruptcies of brokers in their UFOCs.

Chris Wright, Executive VP of MatchPoint and the lead person for its U.S. program, agrees that the FTC Rule change will not be significant for his company. First and foremost, he said they will always submit the same disclosure information that was required by FTC to every one of their franchisors. That includes all administrator bios and a complete history of all consultants, but he adds, "If franchisors choose not to disclose that information, that is their choice."  Wright said if he were a franchisor he probably wouldn't want it in the UFOC because it does make it a lot larger, but having it in their records allows franchisors to offer it to prospects. According to Wright, MatchPoint, a new referral network formally launched last February. will have approximately 40 consultants next month.

More importantly,  Steve Rosen, new owner/CEO of FranNet, said the Commission was doing away with the first meeting rule. He said, "There was always a debate about what constituted the 'first meeting' which determined when the prospect was to receive an actual copy of the UFOC disclosure documents. FranNet always told would-be franchisees to go look at other concepts as well as the one they recommended, so it was never looked at as the first face-to-face meeting." Rosen said although the FTC struggled with that, they finally agreed it was all right to do it that way. Now with the new FTC Rule, he feels it doesn't make any difference, saying, "As long as the potential buyer has access to documentation within a certain number of days, irrespective of where they get it, then that is sufficient."  FranNet has approximately 90 brokers, so it saw it as a burden having to submit updated information every year or two.

Wright reiterated that doing away with the "first face-to-face meeting" requirements also doesn't affect MatchPoint consultants because they are not involved in the actual sale of the franchise to prospects. He explained that their people are more like a buyer's agent. "It's all about the consumer and I think in our industry we sometimes forget that. Our job is to provide them with more education, more information and more honest ethical consulting." He feels if they can provide the consumers with more choices and options, then they are starting the process properly. Wright said they are there to help the prospect and the franchisor go through mutual due diligence and learn what they need to learn.

The biggest problem expressed by Jeff Elgin, CEO of FranChoice, is that all registration states have not adopted the FTC changes. He said, "Even if one state still requires disclosures of all brokers, referral networks have to put together all that information and supply it to the franchisors to put in their UFOCs." Elgin feels that if they only had to disclose the broker company, not all the individuals, that would also help. 

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Related readings:

• When To Run From Your Franchise Broker
• Part 1: The Rules Have Changed for Franchise Brokers and Franchisors