Reclaiming Control Over Franchise Development and Candidate Quality

By Michael Seid, Managing Director, MSA Worldwide

In my recent “Rethinking Franchising” article, I posed a question that made some franchise executives uncomfortable:

Why do franchisors continue to outsource core franchise development functions to third parties when the tools to internalize development have never been more powerful, efficient, or scalable?

It’s a question worth revisiting because the answer exposes a structural weakness that has become normalized in modern franchising:

• Third-party sellers do not create prospective franchisees. They monetize introductions – introductions that franchisors can generate internally at lower cost, with greater control, and with far stronger alignment to long-term system health.

For decades, franchise recruitment was handled internally. Systems expanded because the people responsible for supporting franchisees were also responsible for selecting them. Cultural fit, operational aptitude, and alignment with brand values were inseparable from growth. As franchising scaled, many franchisors adopted the belief that franchise recruitment and sales was a specialized function best outsourced to brokers and Franchise Sales Organizations (FSOs), who claimed access to candidate pools franchisors could not reach on their own.

Outsourcing franchise development does not withstand scrutiny.

The mechanisms that generate franchise leads are neither secret nor proprietary; they are publicly available, widely used, and fully replicable by any disciplined franchisor willing to invest in internal capability. These include search engines, franchise portals, targeted digital advertising, social media, retargeting, SEO-driven educational content, multi-unit and multi-brand targeting, acquisition opportunities, local entrepreneurial engagement, trade shows and sponsorships, reviews, content marketing, website optimization, email and print marketing, public relations, franchisee referrals, and resale marketplaces. Artificial intelligence will make internal recruitment even more efficient and scalable.

Third-party sellers did not invent these channels. Their business model is built on positioning themselves at the decision window – owning the early narrative, controlling access to prospects, and allocating candidates across a portfolio of brands. That access is then resold to franchisors at a significant margin.

This is not lead generation: it is intermediation.

Outsourced franchise development does more than separate franchisors from candidates; it alters the economics of franchising itself.

• Third-party sellers are compensated at the moment a franchise is sold, not when the franchisee or system succeeds.
• Their commissions – often a significant percentage of the initial franchise fee and sometimes exceeding it – are paid regardless of whether the franchise opens on time, operates profitably, or ever expands.

This compensation structure creates a distortion. Franchise fees are no longer determined solely by the value of the opportunity or the actual costs of training, onboarding, and early support. They must also absorb an acquisition premium demanded by intermediaries. As a result, franchisees fund inefficiencies that add no operational value to the franchise relationship.

• Third-party seller fees also can leave the franchisor with a deficit in the resources required to onboard and support new franchisees.
• As we have recently seen with several brands, rapid growth in an attempt to scale quickly can be extremely risky for both the franchisor and the franchisees brought into the system.

The distortion extends beyond pricing and into the franchise agreement itself.

Brokers and FSOs operate in a transactional environment. Their incentive is to preserve deal flow, accelerate approvals, and minimize friction. There is no incentive to slow the process to explore rights, obligations, or structural protections that may benefit franchisees but complicate or delay a sale. There is also a significant risk, as courts have already found, to a franchisor’s intellectual property and trade secrets because of the actions of third-party sellers in the recruitment process.

Candidates entering through intermediaries are therefore less likely to meaningfully engage with provisions that shape the long-term balance of the relationship: territorial protections, fees, transfer rights, governance, and post-term obligations. These provisions are disclosed, but rarely emphasized. The economics of intermediation reward speed and simplicity, not depth or deliberation.

This is not bad faith; it is design. Brokers and FSOs do not consider themselves fiduciaries of either franchisors or franchisees. They are compensated to place candidates. The faster the placement and the higher the fee, the more efficient the model becomes – for the intermediary.

When franchisors recruit internally, these pressures disappear:

• Internal teams can afford to slow the process, educate candidates thoroughly, and engage in substantive dialogue about both the opportunities and limitations of franchising. An educated prospect is important for long term franchise system sustainability.
• Candidates recruited directly are more likely to understand the obligations, trade-offs, and constraints inherent in the model. That understanding strengthens growth rather than impeding it.

Let’s remember that even where the franchisor substantially controls parts of the recruitment and approval process, whether or not a supplied candidate is quickly approved by the franchisor is a determinant factor in whether additional candidates will be provided by the intermediary.

An even more problematic variation of intermediation is granting brokers a share of ongoing royalties.

Royalties exist to fund continuing support, system improvements, brand stewardship, training, technology, and field services. Diverting any portion of those royalties to third parties – who have no operational role, no support obligations, and no accountability for performance – undermines the purpose of the royalty structure.

I have never understood why any franchisor would include in their compensation to third party sellers a portion of the continuing royalty or other fees. Third-party sellers do not invest in innovation, compliance, or brand protection. They do not bear the cost of underperforming locations or system reinvestment. Yet royalty participation grants them a perpetual financial interest in franchisees they neither support nor oversee, creating a permanent misalignment between compensation and responsibility.

Royalty sharing also incentivizes volume over viability. When paid over the life of a franchise, intermediaries have every reason to maximize placements, even with marginal candidates, while the downside risk is borne entirely by the franchisor and the system. It also clouds economic transparency. Franchisees reasonably expect royalties to be reinvested in the system they operate. Redirecting those funds weakens trust and invites scrutiny.

Internally managed recruitment avoids these conflicts entirely. Royalties remain tied to responsibility, performance, and reinvestment—not to historic introductions.

There is also a regulatory dimension that can no longer be ignored.

For years, third-party sellers operated in a grey area. That era is ending. In 2024 an unusual alignment among the International Franchise Association (IFA), the Coalition of Franchisee Associations (CFA), and the American Association of Franchisees and Dealers (AAFD) emerged in support of California SB 919 and the anticipated NASAA actions requiring registration and pre-sale disclosure by brokers and FSOs. Such consensus is rare – and signals that material issues exist within prevailing recruitment practices.

• California SB 919, due to take effect as early as mid-2026, closes a long-open gap by requiring parties compensated for franchise introductions or sales activity to register as third-party sellers.
• Other states are likely to follow, particularly as NASAA advances model standards governing registration, compensation disclosure, and enforcement.
• Franchise recruitment conducted through commissioned agents is increasingly being treated as a regulated transaction, not merely a marketing function.

As regulatory scrutiny increases, so does legal exposure. In franchise litigation involving recruitment-stage misrepresentations, claims are typically directed at franchisors rather than brokers. FSOs, which often manage the disclosure process itself, raise additional agency questions – particularly regarding responsibility for the accuracy and presentation of disclosure information. Franchisors that recruit internally retain a defensible record of the narrative: what was said, by whom, how candidates were evaluated, and why approvals were granted.

Growth is not a function; it is a competency.

No one scales a brand more responsibly than those accountable for its success. Many franchisor-franchisee disputes originate not from bad intent, but from mismatched expectations and oversold opportunities. What is often described as “qualification” in intermediary models is more accurately filtering designed to protect deal flow rather than system quality.

When I first became a franchisor, we recruited internally, validated personally, emphasized cultural alignment, and pursued disciplined multi-unit growth. That approach worked. Today, with vastly improved technology and data access, internal recruitment is not only feasible – it is more efficient, economical, and strategically sound than ever.

Franchisors who believe their internal teams cannot match third-party growth should question whether they have the right personnel and strategy in place. Development staff should not function as doormen admitting candidates supplied by outsiders. Reliance on intermediaries often reflects a failure to invest properly in internal capability.

• Claims that brands lack the budget, time, or personnel to recruit internally are shortsighted. While internal infrastructure requires upfront investment, those costs pale in comparison to the long-term expense of supporting underperforming franchisees, mediating disputes, or managing failure and litigation.
• Third-party seller fees – often $20,000 to $50,000 or more per sale and compounding for multi-unit deals – are paid before units open and before operator quality is known. Over time, internal recruitment costs less and preserves control over messaging, standards, and expectations.

This argument will be controversial, particularly to those whose livelihoods depend on intermediation. That reaction is understandable – but misplaced. This shift is a rational response to technological progress, regulatory reality, and the need for sustainable franchise systems.

Strengthening franchise systems with internal franchise development

Franchising is entering a phase where market forces will favor systems built on consistency, sustainability, replication, communication, and culture℠:

• Who joins the system, how they are recruited, and how they are supported has always mattered.
• What has changed is the need to reevaluate outdated “best practices” and migrate away from reliance on third-party sellers toward disciplined, internal franchise development.

I firmly believe that the strongest franchise systems of the next decade will be those that own their narrative, control their standards, and take full responsibility for who they invite into their brands.

Making the transition to internal recruitment can be challenging for some brands at first. However, we’re already seeing many franchisors reduce their reliance on third-party recruitment as they take a more strategic, future-focused approach.

Do I expect—or believe it’s beneficial—for brokers and FSOs to exit the field altogether? Of course not. But the marketplace has shifted. Longstanding habits often create challenges for brands, whether in franchising or beyond, and those habits must be questioned. Franchise recruitment has reached that inflection point.

If you’re ready to explore what this shift could look like for your brand, give us a call. We can explore the transition for your brand together.

Michael Seid is Managing Director of MSA Worldwide. You can reach him at mseid@msaworldwide.com or 860-523-4257.