Potential franchisees should take a lesson from cautious pedestrians who look both ways before crossing the street. Before paying a substantial franchisee fee, you must be aware and understand that the franchisor may not, or simply won't, be able to handle every related detail for you.
Please don't get me wrong! I am a firm supporter of the franchising concept. There are many existing franchises which are very successful as they have a strong product/service as well as the right people in place. I have found, however, that many franchisors can often fall short in the area of real estate help (specifically in regards to site selecting and lease negotiating). Finding the right location is vital to a franchisee's success or failure. However, this crucial step is not always given due consideration. I simply want to stress that, when it comes to finding space for a franchisee, franchisors may only offer limited assistance due to lack of time, money, and resources. Furthermore, a franchisor may or may not have an in-house real estate department dedicated to assisting franchisees in these matters.
When it comes to offering real estate help, there are, essentially, three main ways that a franchisor can support a new franchisee.
- The franchisor will conduct site selection, secure and lease the location, and then sublease the unit to the franchisee. With this arrangement, the franchisee is obligated to accept the chosen location. However, they do not accept final responsibility for the lease. The franchisor, having signed the "head lease" for the location, will ultimately be liable. Should the franchisee struggle or pull out entirely, the franchisor will often try to resell the business to a new franchisee.
- The franchisor or its area manager/developer will conduct site selection, but they will leave the lease negotiations to the franchisee. Typically, franchisees have little or no experience with such matters - they may be lucky to negotiate a commercial lease once or twice in their lives while savvy agents, leasing representatives, and real estate agents do this every day for a living. This can be comparable to a complete novice facing a master in a game of chess. The franchisee may well enter into the process unprepared and not ask the right questions or negotiate effectively. As a result, that franchisee can blindly agree to an inappropriate lease term, accept too much commercial space for their actual needs, and/or miss out on receiving valuable tenant inducements (including tenant allowances, build-out assistance, and/or free rent).
- The franchisor will delegate the leasing process to the franchisee to find and lease their own location, often referring them to a broker. This is, typically, the worst scenario for the franchisee. As above, a franchisee may be inexperienced in such matters and not know exactly what to look for. You've likely heard the adage of "location, location, location" and there are many elements involved with making the best decision.
Therefore, before signing on the dotted line, franchisees need to understand exactly how much help the franchisor will provide. You can learn what you need to know by asking the following questions:
- Does the franchisor have an in-house real estate department or person working on salary or receiving a commission from the landlord?
- Does the franchisor have a real estate department/person who contacts brokers to show properties? Despite what many franchise tenants believe, brokers work for landlords and earn healthy commission cheques for signed lease deals. Therefore, that broker may be trying harder to serve the landlord than working in a franchise tenant's best interest.
- Does the franchisor have a so-called "area developer" who matches franchisees with brokers to conduct site selection? As above, this still leaves the franchisee paired with a broker.
- Does the franchisor leave the entire matter (of looking for available space and negotiating the commercial lease) to the franchisee?
To further illustrate these points, allow me to share several real-life stories with you. As The Lease Coach, I was recently invited to conduct a leasing webinar for a recognized franchisor. When communicating with the webinar participants, I found that nine out of 10 of the franchisees listening in to the session were disgruntled with the level of help they initially received from the franchisor. While I am unsure as to what the exact issues were, it seems apparent to me that there was a lack of communication, leaving expectations unfulfilled.
In another instance, I was speaking to a franchisor about several matters and took the opportunity to ask, "How do you find locations for your franchisees? Do you have an in-house real estate department dedicated to this task? Do you phone brokers to work with your franchisees? Can you help a franchisee wishing to open in a distant city, where you are not located?" This franchisor answered, "No, we don't have the time, manpower, or money to travel to each city that we sell a franchise in."
Finally, a franchisor with 300 locations contacted me. In our ensuing discussion, I learned that this franchisor did not have a dedicated real estate department. While the franchise sales reps tried to help new franchisees, they simply did not have the experience necessary to do so. The franchisor had recognized this void and was advertising for a real estate person. But the chosen applicant had only residential real estate experience and not commercial property and/or franchise-related experience.
As you can see, when it comes to buying into a franchise system, it's a case of "buyer beware." While your selected franchisor can - and will - provide name recognition, a proven track record, full-scale training, and so on, you may receive only limited assistance with your real estate needs. By looking both ways before crossing the street and asking the right questions, you can better protect your own financial investment.
Dale Willerton is The Lease Coach - a Senior Commercial and Retail Lease Consultant who works with franchisors and individual franchisees across North America. Willerton is author of "Negotiate Your Franchise Lease or Renewal";he speaks frequently at franchise shows and provides real estate training to franchisors and chains. Visit www.TheLeaseCoach..com / www.DaleWillerton.com/www.HelpULeaseFranchise.com or call 800- 738-9202.