How to Strategically Select Real Estate for Your Franchise and Avoid Costly Mistakes
Expanding a franchise to a new brick-and-mortar location is a thrilling yet challenging step in franchise ownership. With the due diligence complete and the franchise development documents signed, the next pivotal move is choosing the right location to bring your business to life. As the well-known real estate mantra goes, it’s all about “location, location, location.”
But where should you start? Finding prime real estate for expanding a franchise that’s close to your target customers and facilitating the buildout of your store involves navigating costs and challenges that can vary widely depending on the market. For instance, in the fast-casual restaurant industry, Forbes notes that newly developed locations can “cost between $250,000 and $400,000 to ‘turn the key’ and open the doors for business,” depending on the concept and square footage.
While other franchise startup costs like labor, inventory, and marketing can fluctuate, your real estate investment for expanding your franchise is a fixed, pre-launch cost. Ensuring that your decision is sound before signing a lease is crucial to avoid being locked into a struggling business or, worse, facing default. Whether you’re an experienced franchisor entering a new territory or opening your first location, the way you manage the real estate development process significantly impacts not only your bottom line but also how customers discover and engage with your brand.
Navigating these complexities requires careful planning and strategy. To help you succeed, here are the key do’s and don’ts that will guide franchisees in turning their business ideas into successful realities.
1. Real Estate for Expanding a Franchise: Finding the Right Location
Do: Understand your core customer and how your real estate choice positions you to serve them. Today’s wealth of data allows you to (A) define your core customer, and (B) pinpoint areas that align with your target segments. Whether you’re targeting college students at major universities or choosing between markets for a fitness concept, data-driven mapping can guide you. If you’re unsure who to target, consider these methods:
- Analyze performance variations across existing stores: If your brand already has live locations, it’s likely they don’t all perform equally. Examining the differences in sales volume can reveal what factors contribute to the success of higher-performing stores.
- Identify “look-a-like” brands to emulate or target as co-tenants: The brands you share space with, known as co-tenants, can be crucial for attracting similar customers. By positioning yourself near these brands, you increase the chances of the right consumers discovering your product. Lesser-known brands often choose locations near an “anchor tenant” like a gym or grocery store to benefit from increased visibility.
- Test the market with retail partnerships: By negotiating a partnership to place your store within another store, you can gather valuable insights about whether a market or customer base is a good fit for your brand while offsetting rent and possibly generating a percentage of sales for the host business.
Don’t: Overlook the value of your own data. While external data can enrich your understanding of the market, combining it with your internal data often yields the most powerful insights. For a D2C brand transitioning to brick-and-mortar, analyzing where your online customers live can be instrumental in selecting a new site.
2. Lease Negotiation: Navigating the Fine Print
Do: Enlist a real estate attorney to review your lease. Institutional landlords are highly skilled in drafting lease agreements, and having a legal expert review the terms is crucial. Common pitfalls include: (A) agreeing to a landlord termination option, (B) starting rent on a set date rather than when work/permitting is complete, and (C) failing to secure key amenities like signage, dedicated parking, and tenant improvement allowances.
Don’t: Underestimate the importance of street visibility. A unit in a prime center may be discounted, but if it’s tucked away at the back of the property or lacks reputable co-tenants, it might not be the bargain it seems. Landlords know their properties well, and a lower rent could indicate that the space has drawbacks. Ask about tenant turnover to understand why your business might succeed where others have not.
3. Pre-Construction & Buildout: Bringing Your Vision to Life
Do: Conduct a competitive bidding process for your project. Construction costs and quality can vary widely. According to KPMG’s 2023 Global Construction Survey, “37 percent of respondents report that they’ve missed budget and/or schedule performance targets over the past year due to a lack of effective risk management.” Obtaining 2-3 project quotes through a competitive bid process helps you gauge the true cost and quality of your project.
Don’t: Assume everything will fall into place on its own. Larger brands often employ in-house and external construction managers for a reason. If you don’t want to manage every detail yourself, consider hiring a general contractor who also acts as a project manager, coordinating architects, engineers, procurement, and subcontractors.
In today’s competitive real estate market, where “tenants are snatching up available space in record time” according to JLL’s Q2 Retail Outlook, prime space is at a premium. By following these do’s and don’ts and assembling the right team, you can secure prime spaces and ensure that your launch stays on schedule and within budget.
