George Cohon, renowned businessman and founder of...
Are you tempted by a franchise system? We’re not surprised as franchise systems can be very attractive to potential franchisees. Considering that franchise systems often offer a recognized business name, proven sales records, and training, there are plenty of benefits for those joining. But don’t jump in too quickly … even the best franchise systems often fall short when it comes to offering and/or providing real estate help to new franchisees (specifically in the areas of effective site selection and commercial lease negotiating).
Why do franchisors bypass both of these areas? We have heard franchisors explain that they simply lack the time, money, and/or resources to help (the franchisor’s head office and the franchisee are often located in completely different cities and it can be very expensive to fly someone out to meet with the franchisee and time-consuming to physically tour sites of interest). We’re not saying that prospective and/or new franchisees are left completely on their own. Franchisors can – and do – provide support; however, this may come on a more limited basis than what a franchisee might expect or truly need.
We have discussed the various scenarios franchisees can expect from their franchisor in our book, Negotiating Commercial Leases & Renewals FOR DUMMIES. To summarize, here are a few relevant points to consider:
1.The franchisor will conduct all of the necessary site selection. Following the successful securing of a commercial site, the franchisor will headlease the location and then sublease the unit to the franchisee. Naturally, the franchisee must accept the chosen location and will share responsibility for the commercial lease. The advantage to the franchisor is if a franchisee struggles financially or chooses to pull out of the arrangement, the franchisor can offer the entire business for resale to another new franchisee. In this case, mind you, franchisors may not divulge the entire business history to a potential buyer.
2.The franchisor will conduct site selection and the franchisee will manage the required lease negotiations. Here, the franchisee must deal with a far more experienced agent/landlord. Novice franchisees may also be novices when it comes to the commercial lease and not understand that many of the listed points and conditions in the lease are – in fact – completely negotiable to the tenant’s favour. To that end, the franchisee tenant may miss out on valuable tenant inducements (offered by the landlord) and/or agree to pay too high of a rental rate.
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. Franchisees should avoid this scenario at all costs! As mentioned, a franchisee may be inexperienced in such matters and not know exactly what to look for. While some factors may be more obvious with choosing a good location, there are many others which are not as clear.
Therefore, before signing a franchise agreement or a long-term lease agreement, franchisees need to understand exactly how much help the franchisor will provide. Here are a number of recommended questions to ask before you commit to a lengthy lease:
1.Does the franchisor have an in-house real estate department? How is that person paid? If the real estate person is receiving a commission from the landlord, then he/she may be motivated to be of more help to the landlord rather than the franchisee tenant.
2.Does the franchisor have a real estate department/person who contacts agents to show properties? As mentioned above, agents may not always represent your best interests. Instead, they may be only interested in your signing a lease agreement, leasing the largest space possible, and agreeing to pay the highest rent (all of these factors can increase their commission cheques).
3.Does the franchisor have a so-called “Area Developer” who matches franchisees with brokers to conduct site selection? As above, this may still leave the franchisee paired with a broker. Not all Area Developers are real estate savvy or experienced.
4.Is the franchisee solely responsible for searching for available space and negotiating the commercial lease?
We are strong supporters of franchising and know that many exceptional franchise systems do exist. We are also very mindful of the franchisee’s situation. Know what you are getting into completely, do your homework, and step cautiously. Yes, you can benefit and prosper with joining a successful franchise system; understand, however, that your franchisor may only provide you limited assistance (at best) with your real estate needs.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to JeffGrandfield@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.