Potential franchisees should take a lesson from cautious pedestrians who look both ways before crossing the street. Before paying a substantial franchisee fee, you must be aware and understand that the franchisor may not or simply not be able to handle every related detail for you.
Please don’t get us wrong! We are firm supporters of the franchising concept. There are many existing franchises which are very successful as they have a strong product/service as well as the right people in place. We have found; however, that many franchisors can often fall short in the area of real estate help (specifically in regards to site selection and lease negotiating). Finding the right location is vital to a franchisee’s success or failure; however, this crucial step is not always given due consideration. By writing this article, we simply want to stress that when it comes to finding space for a franchisee, franchisors may only offer limited assistance due to lack of time, money and resources. Furthermore, a franchisor may or may not have an in-house real estate department which is dedicated to assisting franchise in these matters.
When it comes to offering real estate help there are essentially three main ways that a franchisor can support a new franchisee. These are summarized below:
1) The franchisor will conduct site selection, secure and lease the location and then sublease the unit to the franchisee. With this arrangement, the franchisee is obligated to accept the chosen location; however, he/she does not accept final responsibility for the lease. The franchisor, having signed the “head lease” for the location, will ultimately be liable. Should the franchisee struggle or pull out entirely, the franchisor will often try to resell the business to a new franchisee.
2) The franchisor or its area manager/ developer will conduct site selection; however, will leave the lease negotiations to the franchisee. Typically, franchisees have little or no experience with such matters – they may be lucky to negotiate a commercial lease once or twice in their lives while savvy agents/leasing representatives/real estate agents do this every day for a living. This can be compared to a complete novice facing a master in a game of chess.
The franchisee may well enter into the process unprepared and neither asks the right questions or negotiates effectively. As a result, that franchisee can blindly agree to an inappropriate lease term, accept too much commercial space for his/her actual needs and/or miss out on receiving valuable tenant inducements (including tenant allowances, build-out assistance and/or free rent).
3) The franchisor will delegate the leasing process to the franchisee to find and lease his/her own location, often referring him/her to a broker. This is typically the worst scenario for the franchisee. As above, a franchisee may be inexperienced in such matters and not know exactly what to look for. You’ve likely heard the adage “location, location, location” and there are many elements involved with making the best decision.
Therefore, before signing on the dotted line, franchisees need to understand exactly how much help the franchisor will provide. You can learn what you need to know by asking the following questions:
1) Does the franchisor have an in-house real estate department or person working on salary or receiving a commission from the landlord?
2) Does the franchisor have a real estate department/person who contacts brokers to show properties? Despite what many franchise tenants believe, brokers work for landlords and earn healthy commission cheques for signed lease deals. Therefore, that broker may be trying harder to serve the landlord than working in a franchise tenant’s best interest.
3) Does the franchisor have a so-called “Area Developer” who matches franchises, with brokers to conduct site selection? As above, this still leaves the franchisee paired with a broker.
4) Does the franchisor leave the entire matter (of looking for available space and negotiating the commercial lease) to the franchisee?
As you can see, when it comes to buying into a franchise system, it’s a case of “buyer beware”. While your selected franchisor can and will provide name recognition, a proven track record, fullscale training and so on, you may receive only limited assistance (at best) with your real estate needs. By looking both ways before crossing the street and asking the right questions, you can better protect your own financial investment.
For a copy of our free CD, Leasing Do’s & Don’ts 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