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After 34 years of negotiating leases for 150 hair salons in California and the New York Metro area, Gary Grace appreciates the advantages of being part of a franchise system with a well-known name.
"You get more respect from the landlord because you have the power and success story of the brand behind you. It really makes a difference," says Grace, CEO of California-based GG Enterprises, which today owns 36 Supercuts salons and one Cost Cutters. "The bigger the name signing the lease, the more secure the landlord feels, and the more leverage you have in negotiating."
These days, nearly all prime real estate is rented, not sold: an estimated 98 percent of retail and commercial space is available only for lease. And while a familiar name might get a franchisee in the door, landing a lease that leads to long-term success takes not only due diligence and attention to the fine print, but also the ability to balance the dual roles of franchisee and tenant, says attorney Amy Cheng, a partner with Cheng Cohen in Chicago.
"As a multi-unit franchisee, you are kind of in the middle," she says. "You have to negotiate the lease with the landlord to protect yourself, and yet you have to get the franchisor's approval. Communicating with both parties is essential for making sure things go smoothly."
Cheng, who works with franchisors and has negotiated deals for multi-unit franchisees, says complications arise when a franchisee brings a franchisor--and the franchise agreement terms--to the table too late, resulting in a three-party negotiation.
"Multi-unit franchisees often don't think about the requirements of franchisors and getting the landlord to understand how important those requirements are up front," she says. "If you have a good franchisee and a good location, it is always my hope that lease negotiations are not what kills the deal."
The level of support franchisors provide varies widely by system, size, industry, and the individual needs of franchisees, says Jim McKenna, president of McKenna Associates, a franchise consultant in Milton, Mass., and founder of The Franchise Real Estate Institute. To take advantage of a brand's real estate expertise, he says, franchisees should take the time to learn what assistance their franchisor offers and speak with other franchisees to find out if the system delivers.
When it comes to learning the ropes of site selection and lease negotiations, most larger franchisors can be invaluable in helping franchisees find the best available site. Smaller systems, with fewer resources and connections, may offer training and guidelines to identify sites and to educate new franchisees on the required lease language and brand's site selection requirements.
The franchisee then does the legwork, based on the system's criteria, such as geography, demographics, size, tenant mix, traffic, parking requirements, and visibility. Franchisees also can take advantage of site research companies such as ESRI and Claritas, using the success factors identified by the franchisor, says McKenna; some franchisors contract directly with these firms and provide these services to their franchisees.
"The best thing a franchisee can do is to listen to the franchisor's advice," says McKenna. "They know their site success factors and what you should pay for the deal."
And, don't stop there, he says. Since the right location is key to long-term financial success, especially for retail concepts, it's smart to seek additional support--whether from a real estate expert at the home office or through a broker--to prepare for the leasing process, particularly since landlords negotiate leases for a living. "All franchisees need to be aware that it is a critically important decision and they need to use the best commercial broker in their area, as well as a local 'connected' real estate attorney," he says.
John Gordon, real estate professional with New Orleans-based Smoothie King, which recently announced an aggressive expansion plan, relies on a network of retail space tenant rep brokers as his eyes and ears on the ground to hunt for the most suitable sites, even before the "For Lease" signs go up.
These are connections that can count--and add up to big savings over the lease term. As the economy improves in different parts of the country, many franchisees, particularly small-box tenants, are fighting over the same locations, says Gordon, who recently partnered with two franchisees to open seven stores in Mississippi and Florida over the next four years. "We have to be quick, negotiate hard, and be reasonable," he says. "We have to understand what deal points matter and focus on them."
Armed with the brand's site selection criteria, franchisees must be analytical and unemotional when searching for a location, says McKenna "Don't fall in love with a piece of property," he says. "Fall in love with your wife or your husband, never with real estate."
And the cheapest rent is not always the best deal. There may be a better site right across the street that costs more per square foot but has a greater chance of leading to higher profitability over the term of the lease. McKenna says opting for a site because the rent is lower can mean locating "60 feet from success."
Marco's Pizza franchisee Laurel Wilkerson, an attorney who spent 20 years as an Army JAG Corps Officer, says that when searching for new locations it pays to be open-minded. She is known to scout sites by driving grid by grid, taking the easy-in, easy-out "soccer mom" approach to uncover where customers live, visibility, and traffic patterns by time of day.
Wilkerson and husband Kevin, a retired colonel with 24 years as an Infantry Officer and a master's degree from Harvard University, are in the midst of a 20-store development in Western Oklahoma, which includes Oklahoma City and Moore, the city flattened by an EF5 tornado last May.
Wilkerson also cautions against just going for the "pretty penny" instead of a location that offers greater long-term bang for the buck. In Moore, for example, the Wilkersons opted for an older site, formerly home to a 7-Eleven that relocated directly across a busy street and that has provided their Marco's restaurant with high visibility, something she says "You just can't buy." In 2012, when they opened at that site, the store set records for the brand's largest-ever U.S. opening.
"Almost every time, we thought we ended up with our second pick and it has turned out to be great," she says. Their strategy is working. In 2012, Marco's named the pair its Multi-Unit Franchisees of the Year.
Once a franchisee narrows down their choices, the focus turns to the economics of the deal, which can include a myriad of terms that can make or break the business (see below). While there is no standard lease agreement, Cheng says she generally sees two types of leases: a lengthy document that addresses every detail large and small; and one where and the landlord has only a two-page document. Both types require a sharp eye, she cautions. And in either case, she says, seek counsel and address any sticky issues at the start.
Franchisees also must look hard for any requirements or regulations in the lease document that restrict them from doing business, such as limits on hours or the type or size of signage, to ensure there is no conflict with their franchise agreement.
Grace always negotiates out the landlord's right to relocate his sign within the shopping center during course of the lease. "This is just death," he says.
Gordon advises franchisees to make sure the rent commencement date matches the day the franchisee will be ready for business. Otherwise, they will owe rent before the cash starts to flow.
Even with a long-term lease, franchisees must think ahead to renewal options before signing. Cheng advises franchisees to lock down renewal terms in the initial lease to prevent the landlord from changing the agreement at renewal time.
Over the years, Grace says he has seen the power balance in lease negotiation cycle back and forth between tenant and landlord. These days, he is in the process of re-upping his available renewal options and, for the most part, has negotiated rent reductions based on current market value. "I try to be fair," he says. "I am willing to pay market rent, but I don't want to pay more than market rent."
A good track record from a tenant who pays the rent on time and is a solid corporate citizen can be used to leverage the negotiation for a second lease, or to position them for a better site or additional locations. It never hurts to ask.
"Everything is negotiable, 100 percent," says Smoothie King's Gordon. "At the end of the day, walking away from a deal is sometimes your best option. If you have confidence in your tenancy and your ability to do business, if the deal is not right there is no sense paying for it."
After a franchisee identifies a desired location, it's time for the negotiations to begin. In most cases, the landlord provides a letter of intent (LOI) or an initial draft of the lease agreement for the franchisee to review. As Gordon noted, everything is negotiable, such as length of the lease, security deposits, concessions for tenant upgrades, personal guarantees, escalation clauses, etc.
One final thought: If the landlord refuses to negotiate at all, most likely you can find a better deal--and a better landlord--someplace else.