Seven Questions You Must Ask Your Franchisor Before Leasing Commercial Space
Whenever I speak at major franchise shows there are always plenty of attendees at my leasing seminars and workshops. The majority of these are future franchisees who are virgin tenants. Not only are they faced with selecting a great franchise system, they are entering into unfamiliar waters with regard to commercial leasing. Many of these entrepreneurs have never negotiated a lease and do not know what questions to ask their franchisor about the commercial leasing process. I am very much pro-franchising but trust me, ignorance is not bliss when it comes to leasing commercial space.
To that end, these are some of the many questions that franchisees need to ask their franchisor in advance of even beginning to look for suitable space to lease:
1. Will the franchisor sign the Head Lease and sublet the space to the franchisee – or will it be the franchisee alone who signs the lease?
Whichever party signs the Head Lease will assume primary responsibility for the lease. Most franchisors want to avoid liability if the franchisee fails; therefore, more often than not, the franchisee solely signs the Head Lease. Ideally, the franchisee would want to sign the Head Lease to retain as much control as possible. As a subtenant to the franchisor, the franchisee would still be fully responsible, along with the franchisor, so why not sign the Head Lease yourself? There is no extra protection or benefit for a franchisee to sublease from a franchisor.
2. What role(s) will the franchisor and franchisee play in the site selection and leasing process?
One of the reasons so many franchisees get upset with their franchisor is the lack of defined roles each party will play in the process. Some franchisors truly provide next to no real estate/leasing help at all. Weeks turn into months and no deal has been done because no timeline checklist or targets were created. While other franchisors say they will handle most of the leasing process many do not deliver. Alternatively, other franchisors may shovel the process off to a real estate agent who may care more about his/her commission than your long-term viability. Every month, I get e-mails from frustrated franchisees who feel their franchisor is letting them down in multiple ways during the leasing process.
3. Will a real estate agent or broker be involved in the leasing process?
There are most commonly two types of agents - the listing or inside agent and the outside agent. You will recognize the listing agent as having his/her “For Lease” sign on the building. This agent’s job is to get the landlord the best deal possible (the highest rent, most deposit etc). The outside agent may or may not be working in the tenant’s best interest. Some franchisors may match their franchisees up with local brokers who find a location and do the deal but ultimately get handsomely rewarded with a commission check from the landlord. One franchisee asked me why the agent was only showing her the agent’s own listings. I explained that the agent would earn a full commission or fee and not have to split it with other agents if she leased his listing. Some franchisees think it is naïve of them to expect the landlord-paid agent to represent the tenant too – who can serve two masters?
4. Will the franchisee have final control or say over the location and lease terms?
Most franchisors will defer to a franchisee’s wishes when it comes to choosing between two or three sites for lease. But did you ever stop to confirm that you, the franchisee, have that right? The argument may not be even picking the best site – it might be you trying to avoid a location you hate because the franchisor insists that you lease there. The franchisee is the one taking the risk, paying for the building out, signing the lease and paying all of the rent – make sure you have the power of veto when it comes to site selection.
5. What if we can’t find a good location or reasonable lease deal?
When I finished speaking at the franchise show in Washington, DC a young couple approached me to help them. They had just signed up for a franchise and knew several plazas in their community that would be perfect for their concept. They wanted me to negotiate one of these locations to a completed lease. Unfortunately, upon investigation all of these plazas were achieving rental rates 25-30% above the franchisor’s maximum recommended rental rate. In another situation, a sub shop franchisee quit her job and waited one year while the franchisor failed to produce a suitable location. Both these potential franchisees finally gave up and forfeited their franchise fees because the right space at the right rental rate was not available. Don’t assume that just because you buy into a franchise system there will be a location or landlord waiting to take you in.
6. How will my site(s) ultimately be approved or denied?
Most franchisors will provide a checklist in advance to be completed on various sites to determine their potential. Desired criteria would include traffic count, demographics, etc. However, not all franchisors will send someone from their head office to negotiate or personally visit your city or site. One franchisor with several hundred locations told me the franchisor did not have the manpower or the money to fly there in person – and that the franchisee was pretty much left on his/her own. Many franchisees complain that the franchisor’s site visit was only in the late stages of the leasing process instead of in advance to help them scout the territory.
7. Who is responsible for reviewing all lease documents?
An entrepreneur in California decided to buy a franchise and recruited my assistance with the leasing process. I have to admit that the franchisor was both knowledgeable and ready to help at some levels; however, this did not include the lease document review. Another tenant called me in frustration after paying a lawyer over $20,000 to do his lease. Franchisees may mistakenly think that since the lease is a legal document they need to use an attorney. Pretty much all lease documents are legal – it’s the business terms or moving parts within a lease document that need to be negotiated. For example, one tenant who had renewed her lease twice in 13 years still had a $13,000 deposit held by the landlord. The lawyer had told the tenant that a deposit was standard and reasonably acceptable. But no one told the tenant that she could have and should have negotiated to have the deposit applied to the first month of the lease renewal term as a reward for resigning.
Bonus Question: Can the franchisee involve his/her own lease consultant to represent him/her?
Yes. I did a leasing webinar for established franchisees after which I offered a free 20-minute consultation. Ninety percent of the franchisees who I spoke with said they were very unhappy with the level of guidance and support they got through the leasing process. Even though the franchisor had in-house real estate help these franchisees did not feel anyone was working for their best interest. Many franchisees discovered and complained that the franchisor’s in-house real estate person was not being paid by the franchisor – but rather receiving a commission or fee from the broker. These franchisees felt that was a conflict of interest. So always ask, how is the person helping me being paid, and by whom?
As The Lease Coach, I am a magnet for disgruntled franchisees, so I don’t want to come off sounding negative. There are many wonderful franchise systems out there.
The franchisee must look out for him/herself. This means you may want to bring in your own hired gun lease consultant whom you pay and who will only represent you. Many excellent franchisors will refer you to outside help if necessary or at least let you find your own real estate support team.
To receive a free CD called Leasing Do’s & Don’ts for Franchise Tenants simply e-mail me at DaleWillerton@TheLeaseCoach.com and even request a no-obligation consultation. Remember, a great franchise in a poor location will not achieve its maximum potential.
Dale Willerton is The Lease Coach, a Senior Commercial Lease Consultant and author of “Negotiate Your Franchise Lease or Renewal”. Willerton travels extensively training franchisors and their franchisees in leasing. Willerton frequently speaks at IFA and CFA Franchise Shows. 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.