A Good Franchise in a Poor Location will become a Poor Business!
One of the most effective strategies to conducting site selection is not by looking for the proverbial needle in a haystack (or the perfect location) but instead, by using the process of elimination to get you there.
Arguably, the number one reason for a franchisee’s failure or poor performance is due to a poor location. A poor location ultimately results from poor site selection. How else can you explain that identical stores from the same chain or franchise system will vary as much as 200 percent in sales volumes? Of course you will need to factor in store size, marketing budgets, management and so on; however, these are all secondary to the importance of location, in my opinion.
Essentially, there are three types of franchise businesses: profitable, break-even and go-broke. A truly profitable franchise location will make money and the business will appreciate in value.
A break-even franchise location will pay the owner a small salary and pay the rent but not much more. The go-broke location that comes to my mind lasted less than 12 months from opening to closing for one unfortunate franchisee. Despite my warnings that this was a go-broke location, the franchisee poured in $200,000 into the store setup and couldn’t pay the rent by the sixth month of operation. Usually, a go-broke location will not only steal your capital but also put you into personal bankruptcy – after you have maxed out your credit.
If you thought that franchise site selection was all about location – location – location, you’re right … intellectually. However, when first-time tenants with limited leasing experience are involved in the site selection process, good old common sense often goes out the window. Consider for a moment that site selection involves both science (with part research and part timing) and good intuition (experience). Franchise tenants, typically, will mistakenly rely on either a landlord’s agent/broker or their franchisor (without a dedicated in-house real estate team) to lead them through the process.
In my book, Negotiate Your Franchise Lease or Renewal, I have dedicated an entire chapter to site selection. Here are just a few relevant tips from the expert:
1) Allow enough time so that you’re not making decisions under pressure. Typically, for a new franchise business, you should start the site selection process six months or more in advance of when you want to open. If you find a prime location, usually the landlord will hold it for you for a few months. However, if the process takes longer, you may need several months to finalize the Offer to Lease, review the formal lease documents and/or build out the store.
2) Don’t let one agent/broker show you space all over town. Franchise tenants often fail to realize that agents typically work for landlords who pay them a commission on lease deals signed and closed. When one agent shows you another agent’s listings, this will effectively create commission-splitting between the property’s listing agent and the leasing agent. This will also undermine your negotiating power since the landlord’s listing agent wants to find his own tenant and collect a full commission. An agent/broker may be very helpful in pointing out a location you were unaware of, but remember who they are working for. While their advice may be sincere, it may be sincerely wrong or self-serving.
3) Make your leasing inquiry by calling the “For Lease” number on the property sign. This way, you will meet and negotiate with the listing agent directly. Tour prospective sites in order from worst to best based on curb appeal. This way, you will become more confident, ask better questions and be more in control of the leasing process.
4) Don’t telegraph your intentions by giving buying signals. Ask the leasing representative to e-mail you preliminary information before you agree to view the space. When viewing, stifle the urge to think out loud; subtle comments to a partner/spouse and overheard by the leasing representative can work against you. If you’re asked how much you have budgeted for rental payments, remain vague. Not every question asked deserves an answer – not yet, anyway.
If you find yourself weighing a better location at a higher rent versus a lesser location at a lower rent, my advice is to go for the first option, within reason. When consulting to franchise tenants and doing site selection, my job isn’t to find the cheapest location, it is to select a site that will help the tenant maximize his/her sales.
Also remember that landlords sometimes prefer to lease their worst space(s) first and save the best space(s) for last. Usually, the individual unit or location you lease within a shopping center or strip mall is more important that the mall itself – or at least equally important. Know that lease rates within a building can vary by 200 percent depending on unit desirability, walk or drive-by traffic flow, space shape, quality of neighbouring tenants, anchor tenants and your operating status as an independent or a national chain name. While you don’t always get what you pay for in leasing commercial space, you normally don’t get more than you pay for either.
Note that if you already own a franchise business and are facing a lease renewal or a re-location, you should start the re-location or site selection process approximately nine months ahead of the lease expiry date. If you cannot find a satisfactory new location, you will still have time to negotiate your lease renewal.
Dale Willerton – The Lease Coach is a Commercial Lease Consultant and author of “Negotiate Your Franchise Lease or Renewal”. Got a leasing question? Need help with your new lease or renewal? Need a speaker at your next franchise convention?
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