What If You Buy a Franchise – But Can’t Find A Suitable Location or Space to Lease?
Whenever we speak at Franchise Shows onthe topic of Negotiating CommercialLeases & Renewals For Dummies, our sessions attract both prospectivefranchisees looking for a franchise opportunity as well as new franchisees thathave already purchased a franchise and are now hot on the site selection trail.It is very common for these new franchisees to question us at our seminars (orcall us afterwards) with a common problem – they need to lease space for theirfranchise but cannot find a suitable location.
When it comes to site selection,franchisees must understand that a franchisor may offer limited help or leavethe process to them to complete independently. Either way, results are neverguaranteed as leasable commercial properties (especially those fitting afranchisor’s listed criteria) may be either difficult to secure or notavailable at all. A franchisee may be financially obligated to a franchisesystem without having a place to open and do business. As proof, we will sharewith you some case studies and unhappy endings that we have learned about.
Mary’sCase Study - Mary buys a well-known QSRfranchise with over 1,000 units and earnestly begins the site selection process.Every location she submits to the franchisor is rejected, not because thelocations for lease are not suitable, but because that strip plaza location wasalready verbally committed to one of the franchisor’s existing franchisees forstore number 2, 3 or 4. No one told Marywhen she purchased the franchise that the best plaza locations for lease werealready spoken for and committed to existing franchisee growth. After a yearwithout finding a suitable location, Mary gives up and walks away from herprepaid franchisee fee.
Jim’sCase Study - Jim buys into a relatively newfranchise concept (less than two years old and with less than 20 locations). Everylocation Jim finds in his territory for lease is too expensive based on thefranchisor’s proforma rental recommendations. Jim is very frustrated becausethere is plenty of space for lease, but he cannot afford it. Jim, under legalpressure from his franchisor to open a store within the 120-day timeframecalled for in the franchise agreement goes with a gut feeling that businesswill be good and that he will be able to pay a higher rent. Jim signs acommercial lease, opens but closes within one year – not from lack of sales butmostly from excessive rent overhead.
Connie’sCase Study - Connie purchases a franchiseterritory. The franchisor and various realtors work on finding Connie asuitable location. While some excellent locations are available for lease, theyare all too large or too small. The franchisor recommends about 2,200 squarefeet but, with no other options, Connie gives in to pressure (against herintuition) and signs a lease on a 3,045 square foot strip plaza location. Businessis 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. Noone will buy it because the overhead in rent, staff and original build outcosts etc, were too high. Connie closes.
Robert’sCase Study – Robert wants to spend as little onrent as possible when he sets up his new franchise - and doesn’t understandthat location is often king for popular retail franchises. Robert is prettymuch left on his own to lease whatever location he so desires with noparticipation or interference from the franchisor. The franchisor doesn’t visitthe location but simply rubber stamps its approval on the proposed site. Robertchooses a site off the beaten track so rent is not a problem. However, fivemonths after Robert opens, the franchisor’s biggest national competitor leasesa prime location with great visibility on the main street (two blocks fromRobert’s lesser location around the corner).Seventeen months later Robert closes because of lack of sales.
A good franchise system in a poorlocation will not achieve its full potential. A poor location can defined assuch because it is too big, too small or has the wrong physical shape.Additionally, it could be the right property but the wrong location, be tooexpensive or not include sufficient parking for your staff and customers,
It almost never occurs to theprospective franchisee that he/she may not find a suitable location to lease. Otherwise,potential franchisees would only purchase a franchise with a specific conditionallowing them to dissolve the franchise agreement and get their deposit back ifa suitable location for lease cannot be found within a specific period of time.If you plan for the unexpected you will not be left owning a franchise with nowhereto pitch your tent.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail yourrequest to DaleWillerton@TheLeaseCoach.com.
Dale Willerton and Jeff Grandfield - The Lease Coach are CommercialLease Consultants who work exclusively for tenants. Dale and Jeff areprofessional speakers and co-authors of Negotiating Commercial Leases &Renewals For Dummies (Wiley, 2013). Got a leasing question? Need help with yournew lease or renewal? Call 1-800-738-9202, e-mailDaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.
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