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Whenever we speak at Franchise Shows on the topic of Negotiating Commercial Leases & Renewals For Dummies, our sessions attract both prospective franchisees looking for a franchise opportunity as well as new franchisees that have 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 (or call us afterwards) with a common problem – they need to lease space for their franchise but cannot find a suitable location.
When it comes to site selection, franchisees must understand that a franchisor may offer limited help or leave the process to them to complete independently. Either way, results are never guaranteed as leasable commercial properties (especially those fitting a franchisor’s listed criteria) may be either difficult to secure or not available at all. A franchisee may be financially obligated to a franchise system without having a place to open and do business. As proof, we will share with you some case studies and unhappy endings that we have learned about.
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.
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.
Connie’s Case Study - Connie purchases a franchise territory. The franchisor and various realtors work on finding Connie a suitable location. While some excellent locations are available for lease, they are all too large or too small. The franchisor recommends about 2,200 square feet but, with no other options, 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 the overhead in rent, staff and original build out costs etc, were too high. Connie closes.
Robert’s Case Study – Robert wants to spend as little on rent as possible when he sets up his new franchise - and 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 location 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.
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 property but the wrong location, be too expensive or not include sufficient parking for your staff and customers,
It almost never occurs to the prospective franchisee that he/she may not find a suitable location to lease. Otherwise, potential franchisees would only purchase a franchise with a specific condition allowing them to dissolve the franchise agreement and get their deposit back if a 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 nowhere to pitch your tent.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to DaleWillerton@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.