Considering a Lease Renewal? Ensure Your Deal Supports Profitability and Long-Term Plans

A  lease renewal may seem like a real estate decision, but for a franchisee, it is also a profit decision, a franchise agreement decision, and potentially an exit-planning decision.

If you are facing a rent increase, you are not alone. According to CBRE’s U.S. Retail Figures Q2 2026, average U.S. retail asking rents rose 2.4% over the prior year, and retail availability remained relatively tight at 4.9%. National trends don’t determine what is reasonable for a particular location, but they provide an important reminder: Franchisees should prepare well before responding to a renewal proposal.

The objective is to secure a lease that supports the business’s profitability, value, and long-term plans.

Start Early

Begin evaluating your options 12 to 18 months before the lease expires. Larger locations, specialized spaces, or moves requiring extensive construction may require 18 to 24 months of planning.

First, review the lease for renewal-option deadlines and notice requirements. Missing a deadline can limit your options before negotiations begin.

Starting early gives you time to assess your current location, research the market, tour comparable properties, negotiate terms, obtain franchisor approval, complete improvements, and relocate if that proves to be the better choice. If you wait until only a few months remain, the landlord may recognize that moving is no longer a realistic option.

Evaluate how effectively the existing space serves the business. Consider its visibility, accessibility, parking, customer convenience, capacity for growth, condition, and alignment with the brand. Consider customer familiarity, improvements already made, and limitations that may constrain sales or increase future costs. Then investigate:

• Rental rates and recent transactions for comparable locations
• Vacancies within the center and nearby properties
• Concessions and tenant-improvement allowances
• Common-area maintenance, property taxes, and insurance
• Improvements planned for the property

This information helps you determine whether the proposed terms reflect market conditions and how your current location compares to the alternatives.

Do the Math

Next, determine how an expected rent increase will affect your ability to meet your long- and short-term profit goals. Suppose monthly rent increases from $6,000 to $7,500. That adds $18,000 to annual fixed expenses. At a 20% contribution margin, the business needs $90,000 in additional annual sales to maintain its current profit: $18,000 ÷ 20% = $90,000, or Incremental Fixed Costs ÷ Contribution Margin = Incremental Sales Required.
Traditional breakeven identifies the sales volume needed to avoid a loss. Breakeven Plus identifies the sales volume needed to cover fixed expenses and achieve your target profit: (Fixed Expenses + Target Profit) ÷ Contribution Margin = Breakeven Plus Sales.

With the new cost structure, what sales would achieve the profit goal? How close is that to your current sales volume? If the proposed rent raises Breakeven Plus sales by $90,000, from $800,000 to $890,000, and you’re on track to hit $1 million, that’s a very different scenario than if you’re on track to reach your original goal of $800,000.

The location may still be profitable, but there is less room for a sales decline, unexpected costs, or future investments.

The Entire Package

Base rent is only one part of the economics. If the landlord has limited flexibility on rent, other terms may improve the agreement or mitigate risk:

• Phasing in the rent increase
• Adjusting annual escalators
• Negotiating a tenant-improvement allowance
• Capping common-area maintenance increases
• Clarifying responsibility for major repairs
• Adding renewal options
• Revisiting personal guarantees
• Improving assignment and transfer provisions

Evaluate each concession financially. For example, a tenant-improvement allowance may reduce your immediate cash requirement, but some or all of its cost may be reflected in higher rent.

Mind The Exit

Consider the lease and franchise agreement together. Ideally, their renewal periods should be reasonably aligned. The lease should also align with your expected holding period. This is one of many reasons every business owner should plan how and when they will leave the business. The calendar is undefeated, and time flies.

An owner planning to operate for many years may value a longer term and additional renewal options. An owner anticipating a future sale should aim to align lease terms and assignment provisions to facilitate a smooth transfer to a qualified buyer.

Coordinate with the franchisor on renewal timing, site requirements, required improvements, and transfer provisions. A commercial real estate broker and an attorney can help evaluate market terms and lease terms.

The Path Forward

For a successful location with meaningful advantages, staying may offer the best balance of profitability, continuity, and manageable risk. In other cases, the analysis may indicate that relocating would better support growth and profitability.

Compare the full financial and operational impacts of staying versus moving, including occupancy costs, buildout, business interruption, customer retention, sales potential, and cash requirements.

The goal is to select the location and lease terms that minimize business risk, increase profit, and build a strong foundation for the future.

Barbara Nuss, CPA, is the president and founder of Profit Soup, a financial education organization that provides services to franchisors and franchisees to help them trust their numbers, focus on priorities, make better decisions, and earn more profit. Follow Barb on LinkedIn or email [email protected].