Franchise Sales Model Is Broken, Industry Insiders Warn

Franchise brands chasing a 1% lead-to-deal conversion rate are working off numbers the industry itself no longer meets, according to CGI Franchise CEO Art Coley, who says the real average has fallen to between 25 and 50 basis points — meaning 200 to 400 leads per signed agreement.

Coley laid out the critique on 1851 Franchise's Meet the Franchise podcast with publisher Nick Powills. His central charge: franchisors accept borrowed benchmarks, such as a $13,000 cost per lead, instead of studying their own data. "If you're building your whole platform and thinking that, okay, if I'm at the industry average... you should be signing one out of a hundred, and the real number for you might be one out of six hundred, you've got a problem," Coley said.

What is the Recruitment Operating System?

Coley, who has spent more than 30 years in franchising, created the Recruitment Operating System®, a framework that helps franchisors run their own development rather than depending on broker networks or lead-generation agencies. He positions the firm against the very intermediaries he criticizes.

"At ROS, we'll talk with any brand. We will even tie our compensation to the performance of your franchisees over five, 10 or 15 years," Coley said. "We aren't brokers or an FSO. Think of us as the franchisor to your franchise development. We provide manual systems and analytics for lead generation, appointment setting, sales and onboarding through 36 months."

His business is at record sales, he said, with more brands seeking help than the firm will accept — evidence, in his reading, that franchisors know the model is failing. The caveat sits inside his own pitch: a consultancy that profits from industry dysfunction is diagnosing that dysfunction.

How do broker fees distort the economics?

Powills argued that franchise fees — originally designed to fund a new franchisee's opening and support — have risen largely to pay brokers. He cited the recent FTC legal action, in which a franchisor, after the lead vendor and broker took their cuts, had no money left to support the franchisees it had signed.

"The brokers are saying, 'We coach for free.' Bullshit. You get paid a significant amount of money; you just don't disclose it to them," Powills said.

Coley proposed mandatory disclosure documents for FSOs and broker groups — listing brands worked with, leads generated, deals produced and franchisee results in years one through three — similar to rules that now govern multi-level marketing. He said he made that recommendation to an industry group years ago. "My services were not asked for again."

Which leads actually perform?

Coley offered franchisors a self-audit: bucket the last five to ten years of signings into organic, broker/FSO, and referral sources, then compare sales and royalties produced. His research, which he admits needs an industry-wide study, found referrals rank first by a wide margin — ahead of website leads, with brokers last. That reframes a $40,000 broker-sourced deal.

The stakes are visible in unit counts. The IFA reports roughly 850,000 to 860,000 franchised units in the U.S., a figure Coley notes was not much different 20 years ago, while total U.S. businesses now exceed 30 million. Inflation-adjusted, he suspects franchise units may have shrunk.

Has franchising priced out bootstrappers?

Powills pointed to entry costs: a restaurant that cost $200,000 to open its first location now costs $2 million. "We've eliminated bootstrapping," he said, arguing the industry now serves investors rather than entrepreneurial owners.

Ownership itself has shifted. Coley cited conference data showing small business owners rank among the most trusted figures in local communities — above police, military and clergy — while private equity sits near the bottom. Yet roughly 60% of the top 200 brands in Franchise Times are majority-controlled by private equity, he said.

Powills added that private equity buyers rarely conduct deep due diligence with franchisees, and franchisees receive no equity when a founder sells. His prescription: the IFA should demand transparency from broker networks, though he puts the odds at "slim to none" because those networks pay the association too much.

Why does Coley stay optimistic?

The Wall Street Journal, Coley noted, reported that 40% of the adult population is on its way to some version of small business ownership, including 1099 contractors. He argues franchising can capture that wave if it returns to transparency — even data points like franchisee gender breakdowns, which he disclosed openly when he ran a brand where nearly 90% of franchisees were female.

The near-term test is whether disclosure pressure, including the recent FTC settlement, forces broker economics into the open — or whether the money trail, as Powills warned, stays strong enough to block reform.