Ask Sean: Should I Buy a Franchise or Start My Own Brokerage?

Are you considering taking the leap of faith and heading out on your own, but you don’t know if you should start your own brokerage from scratch or purchase a franchise? It’s OK, I have been there too.In my 26-year real estate career, I have built two independent brokerages and was an investor in two franchises with Keller Williams Realty. Not to say that I have all the answers here, but I can shed some light on some of the questions you may have when deciding between starting an independent brokerage and buying a real estate franchise.Here’s a quick rundown of the pros and cons of each from my experience, and some questions you need to answer for yourself before making a decision.Do You Have a Clear Vision & Business Plan for Your Brokerage?If you already have a clear vision for your brokerage and you feel you have a strong business background, then opening an independent brokerage may be the right decision for you. This is because franchisors (the parent franchise company) have already figured out the vision and the business plan for their brokerages, and they are typically inflexible to changes. Imagine a McDonald’s franchisee adding tacos to their menu—that would never fly!Therefore, if you are driven by your own vision that doesn’t align with the franchisor’s vision, then you’re typically not a good candidate for a franchise. On the other hand, if you have the drive to build a brokerage but don’t have a vision or a solid plan, then a franchise may be the perfect solution for you.Before you make your final decision, there are other things you must consider, like how you are going to attract agents and how much it will cost you to get your brokerage up and running.The Benefits of Purchasing a FranchiseWhen it comes to hitting the ground running, franchises have many advantages. Franchises typically have brand name awareness, processes, procedures, and software already in place so you don’t have to make these decisions. The idea behind purchasing a franchise is having a proven model and software systems that will allow you to grow your brokerage faster, and with less risk, than you could on your own. Yes, the upfront costs can be steep, but the benefits and reduced risk can be appealing.But…the Qualifications to Buy One Can Be StrictDon’t get too excited just yet, because many franchises have qualifications and requirements that you must meet before you can be considered a candidate. This can range from your past real estate achievements to your overall net worth.Franchises Can Be Easier to SellOne of the commonly overlooked benefits of a franchise is that there are often other in-company agents and franchisees waiting in line to buy a franchise when a territory opens. Therefore, you may be able to sell your franchise brokerage quicker and for more money than an independent brokerage.Additionally, there are other considerations you must make before investing in a franchise. Things like does your vision align with the vision of the franchise, franchise availability, and the upfront costs. More on that soon.The Benefits of Opening an Independent Brokerage(Source: HelloHomesGr)The unique benefits of opening an independent real estate brokerage are irreplaceable. One of these is that you can be as creative as you choose.One of the main complaints you will hear about owning a franchise is all the rules you must follow. These seemingly arbitrary rules are there to sustain a cohesive brand and to prevent internal conflicts among franchise owners. These rules include things like you must charge agents the same splits, maintain a minimum number of agents and employees, and you cannot have an office space located outside your territory.These rules make sense if you are operating a franchise. However, as an independent brokerage, you wouldn’t be subject to rules like these. You can charge your agents whatever you wish to negotiate, grow your brokerage as fast as you see fit, and seize opportunities by opening offices wherever you choose or not at all, if that is your plan.With independent brokerages, you can create a unique brand because you are not restricted by the franchise’s brand and trademark. This can include your messaging, tag lines, colors, and logos—allowing you to further differentiate yourself from the competition. You already know, if you read my other articles, I love differentiation!So if you have the desire to be creative with your brand, logos, and messaging, and you don’t want to be subject to additional rules, then creating and building your very own independent brokerage might be the right path for you!Do You Have the Systems to Recruit & Retain Agents?If your goal with your real estate brokerage is to have enough agents so that your brokerage provides enough income that you no longer need to sell real estate yourself, then you may be shocked to learn how much of your time will be spent just recruiting agents. I found myself spending two to four hours each day on recruiting agents.Your efforts don’t stop at just recruiting agents. Once you have recruited them to your brokerage, you need to retain them by meeting their needs throughout their real estate career. This includes providing new agent training, marketing assistance, the latest software, and brand awareness. All this while having competitive splits and fees.Individually, these are each manageable, but over time, it can become a monumental and expensive task for an independent brokerage to provide all of these services. Since your real estate sales skills won’t help you here, you will still need to create systems for recruiting from scratch if you decide to start your own brokerage.Franchises provide the processes, procedures, and the software systems to fulfill most of these requirements. This allows you to focus on the task of recruiting instead of the never-ending development of new offerings to attract agents. Most franchises also create additional training and events to build a company culture. This is all thoughtfully designed to develop agent loyalty, thus assisting you with the retention of your agents.It may sound great to have these systems and processes provided for you, but first you need to look at the overall expense associated with opening a real estate franchise.How Much Money Do You Have to Invest Into Your Real Estate Brokerage?One of the largest differences between starting your own independent brokerage and purchasing a franchise is the upfront cost. If you open your own independent brokerage, you can bootstrap the startup by starting in a smaller office or co-working space and using over-the-counter software. You can see more on this topic in my previous article, 7 Things I Wish I Knew Before Starting My Real Estate Brokerage.Purchasing a franchise is buying a proven business model. Franchisors have standards for everything from office space, furniture, equipment, and software. Therefore, you will spend more money earlier on to bring the office up to standards for the franchise brand. That being said, there are lesser-known real estate franchise business models, like NextHome, that have minimal office requirements that can save you money on the startup costs.Initial Franchise FeeFranchises have an upfront franchise fee ranging from $10,000 to $50,000. This is in addition to training, and the office build-out. For example, the median total cost of opening a RE/MAX or Keller Williams franchise today is just over $140,000, and the total cost can be as high as $350,000.RoyaltiesIn addition to the upfront cost, franchises also have an ongoing “royalty” (a fee paid monthly to the franchisor), ranging from 3% to 6% of the gross commissions and/or a monthly fee of $25 to $400 per agent, per month. The royalty fees are typically passed to the agent and not paid by the franchisee directly.CommitmentFranchise agreements are traditionally for terms of five to 20 years, with renewal fees at each interval. The renewal fees are typically 50% of the initial franchise fee. You will want to factor this into your long-term financial plan.The final thing you must consider when investigating the franchise route is the availability of the franchise opportunities in your area.Are There Franchise Opportunities in Your Area?A franchise territory is a geographic boundary around a franchise that prevents another franchisee, within the same company, from opening an office near an existing franchise. This prevents competition (from recruiting, not sales) from within their own company. Many of the most common national franchise brands have long ago sold off their franchise territories in most major cities. This can make purchasing a franchise tricky in some areas, especially if you want to be in a great location.Although franchisors like RE/MAX recently stopped the practice of large franchise territories, they still take into consideration the impact a new franchise would make on their existing franchises.What Do You Do if the Franchise Territories Are Sold Out?Sold-out franchise territories traditionally leave you with one of three options if you truly want to own a franchise:Partner or become an investor in an existing franchise.Join a lesser-known franchise brand that has availability in your area.Select an up-and-coming area that hasn’t been expanded into as of yet.Since franchises know that many prime territories are sold out, some offer other arrangements for investors. For example, Keller Williams is now permitting existing franchisees to partner with agents who wish to run their own brokerage within the existing territories. This allows agents who want to have ownership of a franchise, but don’t have the capital or territory open to do so, to have the support and systems like a Keller Williams franchise.This change creates a new way for agents who desire the opportunity to build a small brokerage without the large expense of a new franchise and the risk of building an independent brokerage. If you are interested in learning more about this option, you can contact me, as I am currently working with Keller Williams as a consultant to help them develop these offices.Bottom LineThere are a lot of things you must consider when making the decision to go out on your own. The decisions you make now may forever affect the success of your brokerage. So do your research and write out a list of pros and cons to opening an independent brokerage versus making the commitment to purchasing a real estate franchise of your own. In the end, the time you spend upfront will save you tens of thousands down the road.Over to YouDid we miss anything, or do you have any experience with building an independent brokerage or franchising that you would like to share? Let us know in the comments or join our Facebook Mastermind Group here.