Making Real Estate a Core Value of Your Franchise System, Part 3 of 4
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 to read or review Part 1, or here for Part 2.
V. Beware the Local Leasing Agent
In an attempt to make a quick sale, franchisors often fall into the pattern of telling potential franchisees what they want to hear, namely: "We have someone in your area who does our real estate." The franchisee may be happy and relieved to hear this, even though using that particular provider may not be in the franchisee's best interests - and here's why.
The majority of local commercial leasing firms represent landlords and tenants. This dual representation lacks a fiduciary responsibility and is a conflict of interest. Thus, these agents have more loyalty to the local landlords who provide the listings and will continue to do so. This long-term relationship with the landlord is more valuable to the agent than the handful of leasing assignments they'll see for franchise locations. In other words, the local leasing agent is less interested in finding the best location and negotiating the best terms for your franchisee (especially in mid-sized markets where franchise locations are limited) than in pleasing the landlord who fuels the agent's long-term income.
New and emerging franchisors have neither the time nor the resources to train geographically dispersed, outsourced real estate firms and leasing agents on their customers, concepts, demographics, unit-level economics, and any unique aspects of high-volume locations - particularly when the location of their next franchise sale is unknown.
Franchise executives have a business and moral obligation to ensure that a franchisee's monthly rent is negotiated to be in the range of 5 to 10 percent of the average system-wide store revenue. Failing to implement a controlled and standardized lease negotiation process can cause franchisees to pay up to 20 percent in monthly occupancy costs and devastate your franchisee's potential profitability.
A leading cause of franchisee attrition is turning a blind eye or blaming reduced store revenue, rather than poor lease negotiation, for high occupancy costs. Lease negotiation must be calculated and performed on the lowest common denominator that represents the average store revenue of 60 percent of your franchisees. This strategy protects the profitability of 20 percent of your lowest-performing stores and maximizes the profitability of 20 percent of your highest-performing stores. This standard of operational excellence can be achieved only by recognizing the importance of using one strategic partner who has mastered your site selection and lease negotiation processes, and who can execute immediately in all 50 states once the franchise agreement is executed.
So, given the nature of leasing agent-landlord relationships and the barriers to training outsourced real estate agents, how should you approach the real estate process with your potential new franchisee? "We have someone in your area who does our real estate" is not the right answer.
VI. The Right Answer: a Strategic Partner
Each rural, medium, metro, and major metropolitan market is different, but the real estate process is the same.
Instead, let your franchisee know that you have developed a standardized real estate process based on your years of experience as a franchisor. Tell them that this proven process includes proprietary methods for selecting the most strategic site, negotiating favorable lease terms, and performing a thorough legal review to ensure the best location and economics for your franchisees.
If you don't have your own real estate professional on staff, explain that your company collaborates closely with a single real estate firm that supports your real estate specifications and guidelines; and that this strategic partner in commercial leasing understands the unique nuances of finding locations and negotiating leases that work to the franchisee's advantage. What's more, this firm has equal access to all vacancies and pocket listings within your local market.
Let your franchisees know that this partnering real estate firm will fly into their market, at no cost to the them, to identify the highest-quality location, and then work on the franchisee's behalf and in their best interests to negotiate a lease that adheres to your high operating standards (the same standards you'd apply to a corporate store). Once the franchisee has indicated their preferred final site selection and has executed a letter of intent (LOI), you as the franchisor will approve or disapprove the location. If approved, your strategic partner's legal team or a local attorney will then review the landlord lease.
VII. Protecting Yourself while Promoting Franchisee Success
By adopting this process and sharing it with your franchisees you are offering the highest-quality real estate services to your franchisees to support their success in their new location. At the same time, you also secure legal protection for yourself by requesting the following:
- Franchisee agrees to a waiver within the franchise agreement acknowledging that you as the franchisor are not responsible for the operating results of the final location.
- Franchisee signs a tenant representation agreement with your third-party, strategic real estate partner executing your franchisee's all-in-one site selection, lease negotiation, and legal review services.
- The franchisee makes a final decision on what location they have decided upon and executes an LOI with the landlord.
- The franchisee will sign a separate legal engagement letter with an attorney to gain further legal advice and counsel on the final landlord lease contract.
- The franchisee executes a landlord lease accepting their own liability within a corporate signature and/or personal guaranty on the location.
While liability cannot be eliminated entirely, regardless of how well your attorney drafts your FDD or franchise agreement, maintaining an involved, committed, and proactive relationship with your franchisees can go a long way toward avoiding franchise lawsuits. The quality of your real estate process is a key part of building this relationship.
Next month, Part 4: VIII. Building a Successful Real Estate Strategy (Site Selection, Lease Negotiation, & Legal Review); IX. The Cost of Do-It-Yourself Site Selection; X. The Financial Impact of a Poorly Negotiated Lease; and XI. Finding the Hidden Profits During Legal Review.
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 or email@example.com.
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