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Chicken or Egg Site Selection and Leasing – Which Comes First, Finding a Franchisee or Finding a Site?

For over 10 years, we have been speaking at franchise showsacross North America. Our topic, of course, is real estate leasing. Bothfranchisees and franchisors attend these seminars dealing with leasenegotiation, site selection and so on. Whether we’re speaking at a franchiseshow in LA, Miami or Toronto, two very distinct camps or systems are evident. Wewill use the “Which comes first - the Chicken or the Egg?” analogy to put thisinto perspective.

With the “Chicken First” approach, franchisors willadvertise for prospective franchisees first, and then once the franchisee issecured, begin the site selection process. This site selection process may bedone with or without the franchisee’s input.

Why do franchisors use the ”Chicken First” approach?  Well, it lets them expand and uncoverprospective franchisees in other cities without making any efforts on the realestate side. If no local entrepreneur steps forward in a specific city fromadvertising efforts, the franchisor will not have to fly and conduct siteselection (franchisors may not have the time, money, and/or qualified staff availableto do so).

With the “Egg First” approach, some franchisors will dotheir real estate development homework initially, secure a site and use thatsite as a tangible platform from which to advertise and sell the franchise.This can be more work, comes at a greater expense and is done far lessfrequently than the easier “Chicken First” approach.

The “Egg First” approach to site selection is far moreadvantageous for both the franchisor and the franchisee. We can’t tell you howoften we receive calls from disgruntled franchisees who bought and paid for afranchise and maybe even went through training camp but are not open forbusiness because the franchisor could not produce a “suitable site” for them. Amajor franchisor was recently forced to refund over a million dollars tofranchisees partly for this very reason.

However, when the franchisee knows in advance what locationhe/she will be leasing before he/she signs the franchise agreement, there areusually fewer grievances. There may still be complaints if the location isweak; however, these are less common because the franchisee knew in advancewhere the store would eventually be located and many of the important leasingdetails (like the size of the store and the rent). In cases where the franchisorhas preselected a poor site, the end result will be the same – low sales and aneventual store closure.

With the “Chicken First” approach to site selection (wherethe franchisee signs on before a location is secured) there are numerousdownsides and questions:

  • What if no location is found – does the franchisorrelease the franchisee? What if the franchisee has already quit his/her day joband has been waiting months to open his/her new franchise? This happened to afranchisee that eventually turned to The Lease Coach when her franchisor couldnot produce a “suitable site”. She had paid her money but was unemployed foralmost a year waiting for a site (which, by the way, never did come to fruitionand she walked away).
  • What if the site the franchisor produces is weak, questionableor located at a greater distance from the franchisee’s home (thereby makingregular commuting more difficult and time-consuming)? Initially, the franchiseewill spend a great deal of time with the new business. The franchisee mayconsider that a great distance to travel will be inconvenient and, inretrospect, would not have signed up with that specific franchise system.
  • What if the location the franchisor selects is too big,the rent is too high or the build-out costs exceed initial projections becauseof uniqueness to that particular site?
We were hired to speak to a 1000 plus store franchise chain.They had invited us to give several real estate training sessions at theirannual conference. Even though the franchisor initially provided some realestate support when the stores were opening, the franchisor did not assist thefranchisees with lease renewal negotiations and relocations.

Why is this story relevant? Well, just a couple of hundredfranchisees own all of those 1000 franchise stores. The easiest way to expandyour franchise system is when a single franchisee becomes a multiple storeoperator. And, if the initial store or location is weak, it will be moredifficult for the franchisee to open more stores.

If a franchisor forces a franchisee to take or lease alocation he/she doesn’t want, is this person likely to open more stores for them?  Unlikely - unless he/she profits despiteobjections. Therefore, it is in the franchisor’s long-term best interests totake the “Egg First” approach to site selection and leasing. By taking thelatter approach to site selection and franchise expansion whenever possible,franchisors will build a stronger and more profitable franchise system.Franchisees will be happier and more profitable in the long run.

For a copy of ourfree CD, Leasing Do’s & Don’ts for FranchiseTenants, please e-mail your request to DaleWillerton@TheLeaseCoach.com.

Dale Willerton and Jeff Grandfield - TheLease Coach are Commercial Lease Consultants who work exclusively for tenants.Dale and Jeff are professional speakers and co-authors of NegotiatingCommercial Leases & Renewals For Dummies (Wiley, 2013). Got a leasingquestion? Need help with your new lease or renewal? Call 1-800-738-9202, e-mailDaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.

 

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