George Cohon, renowned businessman and founder of...
This article is for Franchisees and prospective 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 occupied. Over 95% of all franchises lease their location. Therefore, the site you lease (and the lease terms) largely determines your 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:
Will the Franchisee lease his/her space directly from the landlord or sublease it from the Franchisor? I have written entire articles on this subject in which I explain that one route is not necessarily better than the other; it’s understanding the pros and cons as they apply to you, and getting a fair shake.
Should you sublease, you would want to make sure you receive all inducements. Such inducements are benefits offered by a landlord to a prospective Franchisee tenant in order to encourage that prospective tenant to sign a lease committment. 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.
A disgruntled entrepreneur who recently contacted The Lease Coach had signed a franchise agreement and then began the site selection process independently. The Franchisor was not actively helping the Franchisee look for a site and rejected every selected site. After several months, the frustrated Franchisee broke away from the Franchisor, hired The Lease Coach for help, and opened an independent store.
Many Franchisors do not offer substantial training or support to the Franchisee regarding site selection or commercial lease negotiating. However, almost all Franchisors claim they will handle the real estate aspect of the deal. 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 allot. Remember, your name is going on the lease agreement and you are the one paying the rent. You must take charge of the leasing process.
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 me 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.
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 territory 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.
Furthermore, one Franchisee who I was consulting to specifically picked a certain franchise concept to join because there were none of those stores in his immediate trading area, near the Franchisee’s home. After signing the franchise agreement, the Franchisee started to look into leasing some of the plazas in his area. Unfortunately, all of these great locations 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.
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