Making Real Estate a Core Value of Your Franchise System, Part 2

Hopefully, you are adopting a standardized real estate process that encompasses a clearly defined all-in-one strategy for site selection, lease negotiation, and legal review. I realize that, as a franchise executive, you may not have the time, resources, or capabilities to put this process in place. This four-part series highlights 11 key points for standardizing your real estate process. Click here to read or review Part 1.

II. Looking Closely at Legal Strategy

Don't let legal language limit your real estate services.

To identify the root of this hands-off real estate approach motivated by self-preservation, we must take a closer look at the current legal strategy in play. Franchise agreements are consistently drafted so that franchisees have the right to select their final choice of location. These agreements also provide the franchisor the right to approve or disapprove of the location based on any criteria, with the purpose of protecting the franchisee or other franchisees within the system.

Look even further into the document and you'll find other strategies meant to release the franchisor from responsibility. These include requiring the franchisee to agree to hold the franchisor harmless in the event a poor location contributes to the closure of the business. The majority of FDDs and franchise agreements also refrain from listing an "approved" real estate service provider -- not because doing so is illegal, but because it is simply not advised.

Interpreting this legal advice as a legal must, franchisors refrain from taking an active and committed role in the real estate process. They take limited steps to innovate or improve their current real estate system, or to assume more operational responsibility in providing a higher quality of real estate services.

But keep in mind: Just because you're not actively involved in the real estate decisions made by your franchisee doesn't mean you're excused from your legal responsibilities.

III. More Involvement Doesn't Have To Come with More Risk

The right process with the wrong agent and the wrong agent with the right process will both yield negative results. Your real estate agent or broker should understand your business model as well as your CEO does.

Yes, your consultant or attorney may advise you not to list an approved real estate provider within your FDD. Chances are you've been told that crossing this legal line might result in a lawsuit. But as part of your legal strategy and your real estate process, you should articulate your responsibility as a franchisor to identify an approved and exclusive real estate provider who is trained on your location specifications and guidelines.

You must have the freedom and flexibility to continually improve your real estate process with the aim of boosting store revenues and profitability while reducing franchisee failures. By understanding the difference between legal mandates and legal strategies within your FDD, you'll feel more confident about becoming actively involved in your franchisees' real estate decisions.

The unavoidable fact is that all parties involved in a franchise agreement are exposed to vicarious liability. Regardless of how well your attorney drafts the agreement, a franchisee can still initiate a meritless lawsuit. But keep this in mind: Franchise lawsuits are rarely triggered by the written legality of a contract, but rather by the mismanagement of the franchisor-franchisee relationship.

Bottom line: Don't let your fears of a potential lawsuit prevent you from requiring the use of an approved real estate service provider as part of your franchise agreement. And by all means, don't let it prevent you from supporting the success of your franchisees.

While you're perusing your FDD, ask yourself this: Is it more advisable to let an inexperienced franchisee select their own location? Or would it be smarter for the franchisor to require the use of an approved real estate service provider trained to find the most strategic location for that franchisee? Before you answer, remember that you will have the right to contractually approve the location once it's selected.

We think the answer is clear. The more experienced the real estate professional, and the more informed your franchisee, the better the chance of that franchise store succeeding in that location.

IV. Higher-Quality Locations with a Controlled Sales Process

Chances are you've heard it before. When it comes time to discuss site location, a new franchisee candidate tells you, "I have a friend/family member in real estate." Or perhaps, "I have a real estate background."

These comments reflect a desire common among new franchisees to be in control of the real estate process, even while possessing limited experience with your franchise system's customer, concept, demographics, or economics. As a franchisor, you have the responsibility to speak up and request that your franchisees follow the real estate process you have carefully developed and put in place - thus limiting the franchisee's exposure to unknown risks when opening their first location.

It's tempting, especially when the need for a franchise sale is high, to simply agree with the franchisee who insists on taking control of their own real estate process. But resist the urge to give in. The franchise sale you make will be canceled out if the franchisee fails, resulting in decreased royalty revenue and a higher risk of a lawsuit.

Instead, take the time and effort to firmly explain the real estate system you've put in place for the benefit of your franchisees. Make sure your franchisees understand that this system is proven and tested, and undergoes continual improvement based on best practices you've gleaned with each new location you open.

Next month: V. Beware the Local Leasing Agent; VI. The Right Answer: A Strategic Partner; and VII. Protecting Yourself While Promoting Franchisee Success.

Scott J. Simcik is President and CEO of FGP Commercial Leasing in Westlake Village, Calif. FGP provides an all-in-one real estate service that includes site selection, lease negotiation, and legal review in all 50 states. The company offers a complimentary, 5-week program to assist in standardizing your real estate process. Contact him at 800-471-1682, scott@fgpcl.com, or visit www.fgpcl.com.