And Here’s Why…
The Lease Coach works with many franchisors and strongly supports the franchising industry, but this article is for franchisees.
Virtually every franchise system has franchisees that are doing well or struggling. Franchises operate on a “cookie cutter” system where each franchise store should more-or-less look and operate the same. The one main variable is the location you choose to lease or occupy. Over 95 percent of all franchises lease their location. Therefore, the site you lease (and the lease terms) largely determines your level of success.
It is critically important that you establish and manage your expectations of the franchisor regarding your business location and your lease terms. Here are some tips:
1 Headlease or Sublease
Will the franchisee lease his/her space directly from the landlord or sublease it from the franchisor? We have written entire articles on this subject where we explain that one route is not necessarily better than the other; understanding the pros and cons as they apply to you and getting a fair shake is important. If you sublease, you would want to make sure you receive all inducements. Such inducements are benefits offered by a landlord to a prospective tenant in order to encourage that prospective tenant to sign a lease. If your franchisor enters into a headlease agreement with the landlord and receives monetary inducements and free rent following those negotiations, don’t assume those inducements are all being passed on to you.
2 Site Selection
When a franchisee signs a franchise agreement, they are locked in. If they don’t sign a lease within 60 – 90 days or open within 180 days, they can be penalized. Therefore, franchisees should be conscious of the repercussions if a proper site is not available. Our recommendation is to make the purchase of the franchise agreement conditional upon a suitable site being found.
3 Real Estate Training and Support
Many franchisors do not offer substantial training or support to the franchisee regarding site selection or commercial lease negotiating. However, many franchisors claim they will handle the real estate aspect of the deal. Remember, franchisors may not have the time, staff or resources to physically travel to different cities to view properties. If all the franchisor does is turn you over to a local real estate agent (who is being paid a commission by the landlord) then who is really representing you, the franchise tenant?
This scenario happens alot. We remember one franchisee that was unable to find a suitable location. Her franchisor offered her help at a cost of $3500, which she paid. She was then referred to a local real estate agent who began to show her properties. The franchisee noted that all these properties had the agent’s name as a contact on the “For Lease” sign and contacted The Lease Coach to ask why. We explained that the agent would receive a full commission from the landlord if she leased one of these properties.
4 Territory Rights
A franchisee will normally receive rights to operate from a specific territory or for a site-specific location (meaning a particular plaza or mall). Either way, you must try to establish your area and exclusive rights therein as part of the franchise agreement. Frequently, franchisees will complain to us that their franchisor put another store too close to their store or territory, thereby dividing the business the franchisee thought he/she would get from a local trading area. Your competition may not only be from a competing franchise system but right from within the franchise system you joined.
5 Lack of Suitable Sites for Lease
A well-known franchisor was directed by the court to refund over a million dollars in franchise fees it had collected from new prospective franchisees because the franchisor had essentially oversold the territories and could not produce suitable sites in a timely manner. Meanwhile, many of those franchisees had quit their jobs and wasted up to a year trying to get into business.
6 Lack of Affordable Sites
This is something we hear about frequently. A franchisee’s motivation for specifically picking a certain franchise concept to join is because there are none of those stores in his immediate trading area. After signing the franchise agreement, franchisees will start to look into local leasing opportunities; however, learn that all of the great locations available for lease were more expensive than the rent proforma allowed for by the franchisor. You must remember that what you see is not always what you can afford when it comes to leasing space.
As a potential franchisee, you must remember that whether you thrive or fail is largely dependent on the commercial or retail site you occupy and the lease terms you agree to.
For a copy of our free CD, Leasing Do’s & Dont’s for Franchise Tenants, please
e-mail your request to DaleWillerton@TheLeaseCoach.com.
Dale Willerton and Jeff Grandfield – The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013).
Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.