A different perspective on outsourcing franchise sales
A franchisor consumed with avoiding the risk of a lawsuit may well stay out of court. Indeed, undue risk aversion leads to the ultimate defense against franchisee lawsuits—no franchisees.
In an article appearing in the June/July issue of Franchise Times, Gaylen Knack and Elizabeth Dillon of Gray Plant Mooty discussed outsourcing franchise sales to third parties. They focused on the potential legal liability and economic burdens these outsource arrangements can create for a franchisor, describing a “franchise sales nightmare” and suggesting that outsourcing franchise sales can be a move of desperation rather than a growth strategy.
The article struck a chord with many franchisors and suppliers. Our perspective on outsourcing franchise sales is different and emphasizes several key reasons a franchisor may consider outsourcing. When a franchisor contemplates this option, it must take responsibility for its system and make fully informed decisions on whether to outsource the franchise sales function.
Outsourcing benefits include:
Reduced cost structure/overhead. Hiring a franchise development professional in today’s competitive environment can be expensive with no guarantee of results. By reducing the cost structure and overhead of an in-house sales staff through outsourcing, franchisors can use those resources in real estate, marketing and franchise operational support.
Hire top talent. An outsourced group provides access to sales professionals who are experienced in franchising and have a track record of success. As employees, these sales professionals often would be financially out of reach for small- and medium-sized franchisors. Yet these are the same franchisors that need to attract top talent to grow their brands and stay competitive.
Only pay for results. One attractive feature of the outsourced relationship is that franchisors generally can structure an arrangement where they only pay for results. Mutually aligned interests between the franchisor and the outsourced firm ensures both parties are working toward recruiting high-quality franchisees. If either party compromises this goal, no one wins in the long run. The bottom line is that outsourced firms can be financially successful only if they produce the desired results for franchisors.
Access to lead referral networks. Referral networks play an important role in providing leads to franchisors. Through hard work and long-standing relationships, experienced outsourced groups have access to these referral networks, access that new and emerging franchisors cannot get on their own. This access can translate to significant incremental growth in the franchise system.
Better understanding of compliance issues. Outsourcing enables franchisors to work with people who not only know how to recruit franchisees, but also understand the importance of franchise compliance. Most outsourced sales organizations attract sales professionals with 10 or more years of franchise sales experience, thus potentially reducing the likelihood of compliance errors in the sales process. Franchisors also can and should take steps to minimize compliance errors through using franchise sales compliance procedures, checklists and other best practices.
Grow to the next level. By outsourcing the development process to qualified professionals, franchisors may increase the likelihood that they will achieve their growth objectives sooner. Numerous examples exist of companies that were growing slowly or not at all until they engaged an outsourced firm who helped “put the franchisor on the map.” Are these benefits guaranteed? Absolutely not. Yes, there are legal risks in outsourcing franchise sales, but perhaps no more than having an internal sales person who has no franchise experience and cares more about getting deals done than finding highly qualified franchisees.
Kurt Landwehr is the President of BrandONE Franchise Development and has more than 14 years of franchise sales experience, including 12 years with one of the country’s leading hair care franchisors. He can be reached at email@example.com
Brian Schnell is a co-chair of the franchise team at Faegre & Benson, one of the premier franchise law firms in the country. His clients include several franchisors that outsource franchise sales to third parties and also many franchisors that do not outsource the sales function. Brian can be reached at firstname.lastname@example.org.
The economic burdens also must be considered if the outsourced group is receiving compensation on part of the ongoing royalty stream. It is difficult, however, to generalize that these arrangements “essentially rob the franchisor of most or all of its profits,” as Knack and Dillon conclude. In many instances sharing the royalty stream is not in the franchisor’s best interests. In other instances, however, the arrangement can work to both parties’ benefit. The key is the franchisor must understand the economics of its franchise system (including its revenue and cost structure and how that structure changes as the system may grow) and then have candid conversations with the outsourced group to determine if the parties can reach a mutually acceptable arrangement. No one forces a franchisor to give up control over franchise sales or sign an agreement that does not make sense economically and strategically.
The bottom line is that outsourcing franchise sales is no different than any other aspect of franchising. There are franchise lawyers, public relations groups and marketing firms that truly understand franchising and have the passion and commitment to make a difference. Other lawyers, public relations groups and marketing firms do not. The same is true for outsourced franchise sales organizations. Some excel and are principled in what they do. Others are not.
Should all franchisors outsource franchise sales? No. Many franchisors, however, will keep pursuing the same franchise sales activities they did last year … with the same predictable results. Outsourcing is an alternative strategy. In considering whether to outsource franchise sales, it is incumbent upon each franchisor to take control and responsibility for this decision, understand the options, do its research, and then make a smart decision for its growth opportunities.