How to terminate a franchise agreement
Although a franchisor will give you the tools,...
Selecting a franchise system to join can be much simpler than selecting a commercial location to lease! As The Lease Coach, we routinely hear from franchisees that have begun working with a franchisor but cannot find a site for their new business. Reasons can vary as to why this happens – there may be a lack of commercial space in the local area available; the commercial space available does not meet with the franchisor’s criteria; or the franchisor lacks the time, money, and/or resources to help their franchisees with this process.
It should go without saying therefore that commercial site selection for franchisees does not always go smoothly. The franchisee may be left to conduct site selection completely independently or the franchisor may provide some limited help. Before you join a franchise system, step carefully, do your homework, and ascertain whether this franchisor will assist you. By learning as much as possible about the franchisor, you can likely avoid any number of nasty surprises such as those listed below:
Jim’s Case Study - Jim buys into a relatively new franchise concept (less than two years old and with less than 20 locations). Every location Jim finds in his territory for lease is too expensive based on the franchisor’s proforma rental recommendations. Jim is very frustrated because there is plenty of space for lease, but he cannot afford it. Jim, under legal pressure from his franchisor to open a store within the 120-day timeframe called for in the franchise agreement, goes with a gut feeling that business will be good and that he will be able to pay a higher rent. Jim signs a commercial lease, opens but closes within one year – not from lack of sales but mostly from excessive rent overhead.
Mary’s Case Study - Mary buys a well-known QSR franchise with over 1,000 units and earnestly begins the site selection process. Every location she submits to the franchisor is rejected, not because the locations for lease are not suitable, but because that strip plaza location was already verbally committed to one of the franchisor’s existing franchisees for store number 2, 3 or 4. No one told Mary when she purchased the franchise that the best plaza locations for lease were already spoken for and committed to existing franchisee growth. After a year without finding a suitable location, Mary gives up and walks away from her prepaid franchisee fee.
Robert’s Case Study – Robert wants to spend as little on rent as possible when he sets up his new franchise but doesn’t understand that location is often king for popular retail franchises. Robert is pretty much left on his own to lease whatever location he so desires with no participation or interference from the franchisor. The franchisor doesn’t visit the plaza Robert selects but simply rubber stamps its approval on the proposed site. Robert chooses a site off the beaten track so rent is not a problem. However, five months after Robert opens, the franchisor’s biggest national competitor leases a prime location with great visibility on the main street (two blocks from Robert’s lesser location around the corner). Seventeen months later Robert closes because of lack of sales and competitor pressure.
Connie’s Case Study - Connie purchases a franchise territory. The franchisor recommends leasing no more than 2,200 square feet. The franchisor and various real estate agents work on finding Connie a suitable location. While some excellent locations are available for lease, they are all too large or too small. Connie gives in to pressure (against her intuition) and signs a lease on a 3,045 square foot strip plaza location. Business is okay but all of Connie’s potential profits are feeding the landlord for the extra rent on the larger, unneeded space. After not making a profit for three years, Connie tries to sell the franchise. No one will buy it because it’s too big and too much rent. Connie runs out her lease to the end of her five-year term and closes the business – having lost $300K.
A good franchise system in a poor location will not achieve its full potential. A poor location can defined as such because it is too big, too small or has the wrong physical shape. Additionally, it could be the right plaza but the wrong unit, be too expensive or not include sufficient parking for your staff and customers.
It continually amazes us how prospective franchisees rarely doubt that they will find a suitable location to lease. One simple means of protection could be a specific condition in the Franchise Agreement stating that the Agreement could be dissolved should a potential franchisee be unable to find a suitable location for lease within a specific amount of time. Taking that one step further, franchisees could also be refunded their deposit if they are unsuccessful with site selection for any reason.
While we are strong supporters of franchising, we urge franchisees to avoid making assumptions and to look before they leap … the last thing you want is to be left owing a franchise and not having being able to find appropriate commercial property to lease.
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.