Weighing the benefits

Individuals who obtain their California Bureau of Real Estate (CalBRE) broker license have the option to perform real estate services:

  • under another broker as a broker-associate;
  • independently as a sole proprietor; or
  • as a broker-owner of a brokerage company with agents and support staff.

When building a brokerage, the broker-owner will contemplate between operating their company as an independent brokerage or a franchise. However, when deciding whether or not to brand as a franchise, the prudent broker evaluates these options based on the franchises’:

  • competitive advantages and disadvantages;
  • benefits and drawbacks; and
  • start-up and operating costs.

Appealing to the public

A franchised brokerage has an immediate appeal for clients due to name recognition and the public perception of offering a broader menu of services. Further, in larger cities, there may be more than one franchisee operating under the same franchise name giving the appearance of market dominance, even though these brokerages operate independently and without reliance on one another.

However, from a customer service standpoint, there may not be much difference between a franchise and an independent brokerage.

Many independent brokerages operate similarly to competing franchised brokerages. Often, independent brokerages hold a large market share in their communities, and offer services like company advertising or national relocation assistance, as many franchises do. However, while franchises may offer these additional services as a franchise benefit, independent brokerages have to create their own business model and systems.

The independent brokerage, while avoiding franchise startup costs and fees, is 100% self-reliant. This means the broker-owner has no boilerplate support systems, and must rely on their own strategies and business plan to operate successfully.

The franchise

A real estate franchise is an arrangement where a franchisor grants a franchisee, in this case the broker-owner, the right to market real estate services according to certain specifications using the franchisor’s name, trademark and business systems — a pre-packaged model for a business. The franchise is typically a company with a recognizable trade name and an historic record known to the public. The initial expectation of the independent franchise owner is to immediately benefit from name recognition as a long-standing and established company.

Further, the franchise may offer a business model the broker-owner feels benefits them and their agents, without the initial broad-based name recognition.

Brokers who own franchises buy into the franchise network. Upon becoming a franchise, broker-owners are empowered by the benefits and support systems the franchise offers.

Systems and benefits offered to the franchised company often include:

  • local, state or national marketing and advertising;
  • a business strategy for targeted markets; and
  • a standard operating template.

Targeted markets

A broker-owner might chose a franchise based on their specific business model designed to support the broker’s expertise. Some franchises focus purely on name recognition and traditional real estate brokerage operating methods. Other franchises target specific markets such as property management or commercial sales and leasing.

These business models are specifically designed to assist the broker-owner in operating a niche company without having to create a business strategy and name recognition from scratch. Thus, the broker uses the tools the franchise offers to conduct business without hesitation.

Marketing and advertising

Branding and name recognition are the primary focuses when a broker opts to be under the umbrella of a franchise. Many franchises conduct mass-media marketing on several levels, including national, state and local advertising campaigns on media such as:

  • television;
  • radio; and
  • print.

Further, a franchise offers branded templates for:

  • a company website;
  • letterhead and business cards;
  • signs; and
  • general marketing materials.

Standard operating template

Franchises also include standard operating procedures and business templates. These procedures and templates are generally designed to appeal to the broker-owner and their agents. Standard templates dictate the agent’s compensation structure, such as:

  • the 100% fee arrangement;
  • the profit share incentive; or
  • fee splitting incentives.

These brokerage companies typically offer greater financial benefits to sales agents. However, a prudent agent, depending on their skill level and experience, needs to weigh compensation options in light of the benefits the broker offers, such as training, before committing themselves.

Brand-name recognition

For both the broker-owner and their agents, brand-name recognition is ultimately the primary incentive for doing business under a franchise. However, as a franchisee, the brokerage company becomes affiliated with other franchisees. This may cause the name recognition aspect to backfire as the company’s name is now associated with another broker-owner operation which may not have a positive reputation locally.

Further, consumers are more likely to remember the well-advertised name of the franchise than the name of the individual brokerage firm operating as a franchisee. Thus, the broker-owner needs to place emphasis on promoting their individual firm name as linked to the franchise rather than promote the franchise name by itself. This may be challenging in markets where multiple brokerages operate under the same franchise name.

Ultimately, a franchise is only as powerful as the individual broker-owner. Franchisors acting to protect and preserve their brand often offer business development training and management programs to the broker-owners and their management staff. In addition, training and seminars are frequently offered to their salespeople to improve skills and boost production.

Referrals and relocation

Additional benefits to franchising include potential referral and relocation business. This name affiliation with other franchisees provides a direct source of referral and relocation business. However, when the client has had a bad experience with that particular brand, they may chose not to do business with the referred franchise. Thus, they associate the independently-owned franchise with the referring brokerage operation’s reputation, and avoid patronizing them solely based on the franchise name.

Further, not all franchises reach every market. When relocation business is the result of local home sales, such as retirees, military, highly skilled workers or migration, the broker-owner needs to consider a national franchise that spans a majority of these markets countrywide.

Start-up fees

Franchising a brokerage involves fees beyond the per-transaction royalty fee paid on productivity. Initial franchise fees vary, from several hundred dollars to as much as $100,000.

Further, setting up the physical office under a franchise will incur additional costs for franchise-specific requirements, such as:

  • office and building signage;
  • marketing materials including letterhead, brochures, business cards and “for sale” signs;
  • information technology (IT) systems and programs required by the franchise; and
  • specified mandatory conditions and affiliations.

For the broker-owner considering a franchise, a due diligence investigation is imperative. A cost-benefit analysis needs to be worked up and analyzed when deciding whether or not to become a franchisee.

The Federal Trade Commission (FTC) publishes the Franchise Disclosure Document (FDD), a document that franchisors are required to provide franchisees. [16 Code of Federal Regulation §§436-437]

Business models and systems vary from franchise to franchise, as do start-up costs and fees. For example, the following is a comparison of start-up costs and fees or three common real estate franchises according to the FDD.

Century 21 Real Estate LLC (Century 21) start-up costs and fees include:

  • Initial Franchise Fee, up to $25,000;
  • Royalty Fee, 6% of the gross revenue with a minimum monthly Royalty Fee of $500; and
  • Marketing Fund:
  • 2% of monthly Gross Revenue up to $3,000,000 and 0.5% of Gross Revenues over $3,000,000; or
  • 2% of monthly Gross Revenue, subject to a monthly minimum of $662 and maximum of $1,632.

Coldwell Banker Real Estate LLC (Coldwell Banker) start-up costs and fees include:

  • Initial Franchise Fee, $25,000-$50,000;
  • Royalty Fee, 6% of gross revenue with a varying minimum; and
  • Marketing Fund:
  • 5% of monthly Gross Revenue up to $2,000,000 and 0.5% of Gross Revenues over $2,000,000; or
  • 5% of monthly Gross Revenue, subject to a minimum of $439 and maximum of $1,662 per office per month.

RE/MAX International (Re/Max) start-up costs and fees include:

  • Initial Franchise Fee, $10,000-$25,000;
  • Management Fee, $138 per month (2016) for each Sales Associate in the office with slight annual increases;
  • Promotion Fee, $131 per month (2016) minimum for each Sales Associate in the office with slight annual increases;
  • Transaction Fee, 1% of gross monthly real estate fees earned;
  • Hot Air Balloon Fund, $100 per month; and
  • Annual Dues, $400 per sales associate.

Further, the franchise business models typically determine whether the brokerage will split earned fees with their associates or charge them a monthly desk or office rent in exchange for 100% of their earned fee, less expenses.

The mandated Franchise Disclosure Document (FDD)

The FDD provides prospective franchisees with material information needed to weigh the risks and benefits of investing in a franchise. The franchisor hands the FDD to the prospective franchisee at least 14 days prior to the franchisee:

  • signing any contract; or
  • making any payments to the franchisor or any of their affiliates. [16 CFR §436.2(a)]

The FDD contains information essential to potential franchisees. It discloses 23 specific items of information, including:

  • financial disclosures and statements;
  • financial performance representations and expectations;
  • litigation history;
  • fees and expenses;
  • approved suppliers;
  • obligations of the franchisee; and
  • information on the franchisor’s officers and other franchisees. [16 CFR §436.5]

When the broker decides the franchise benefits outweigh its costs, they need to decide how to fund the franchise. Start-up fees are generally paid up front. However, recurring expenses such as royalties and per-transaction fees are often passed on to the agents. Thus, the broker-owner needs to be careful not to alienate prospective agents by choosing a franchise with fees higher than the market will bear.