How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
Buy into a franchise system and guarantee yourself success? It’s not quite that easy. While franchise systems can be very appealing investments for entrepreneurs, understand that franchisors may not provide a complete turn-key operation for new franchisees. We have found that many of those eager new franchisees are left trying to effectively manage their own site selection and commercial lease negotiating matters.
As The Lease Coach since 1993 and now co-authors of our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013), we routinely recommend that prospective franchisees fully consider numerous franchise systems, weigh the pros and cons of each, evaluate whether they are right for them, and read our following tips – before they sign a franchise agreement.
Typically, the majority of commercial lease deals are five-year lease terms. However, you are not bound to accept this length if it doesn’t work for you. The Lease Coach frequently negotiates three-year, seven-year or ten-year terms for our clients. Furthermore, a lease term can be stated in either years or months. It’s important to factor in the start date and the expiration date of the lease term relative to what’s best for your business. Franchise tenants should make sure that their lease term matches their franchise term to avoid issues later with the lease running longer than the franchise agreement. This happens when the start date of the franchise agreement is prior to the start date of the lease agreement – which may be several months later, when the franchise business actually opens.
Does your franchisor have a site criteria list? Ask for this and use this. You will be looking at locations based on certain factors such as resident age, population density, or income levels. Different franchise systems work better in different locations as well … for example, a high-end frozen yogurt concept may attract more customers in a more affluent or touristy area than in a shopping mall.
With being affiliated with a major franchise system, you will have the advantage when it comes to your looking for and leasing commercial space. Landlords will often prefer to include a franchise tenant (or two) as a property tenant (we’ve seen landlords of new developments striving for up to 100 per cent occupancy of national and regional chains and franchise tenants). Name recognition is the reason why … when customers know (and trust) a franchisor’s name, they will be more likely to shop at that business (and visit other businesses within the same commercial property).
We’ve had franchisors explain to us that they often don’t have the extra staff, time, and/or money to pursue commercial lease opportunities and then assist with lease negotiations. Instead, a franchisor may simply refer you to a local broker or agent in your preferred city. While this may seem like a good answer, remember that that broker or agent works for the landlord. He/she may appear to be helping you (by showing you available sites and answering your questions) but remember that the agent is actually working for the landlord. In return, the agent will collect a healthy landlord-paid commission when you sign a lease agreement. That commission can increase depending on how long you agree to lease commercial space, how much commercial space you lease, and what amount of rent you pay.
In the franchise industry, the franchisor or the franchisee could sign the “head lease” with the landlord. By doing so, either party becomes the “head tenant”. Whoever signs the head lease maintains more control but will, conversely, spend more time on management issues including paying rent directly to the landlord and complaining about leasing issues.
We know full-well how franchisors often carry more weight with landlords and can negotiate favorable amounts of landlord’s work, leasehold improvement allowance, free rent period, no deposit and so on. Note that not all franchisors will pass these benefits on to the franchisee.
Overall, the main reason that franchisors would have for being on the head lease would be to position themselves to re-open or resell that location and franchise if the existing franchisee closes. We have seen franchisors make a tremendous windfall by repackaging a failed franchisee location to another franchisee that is not aware of a previous franchisee’s history in that location.
If you need to discuss your situation or have any questions about commercial and retail leases, please don’t hesitate to contact us.
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.
