Six Questions to Ask Your Franchisor before Leasing Commercial Space
Stepping onto a busy street to cross without looking both ways first can prove to be dangerous! We can say the same thing for entrepreneurs considering a franchise opportunity. Buying into a franchise system is not always cut and dry and entrepreneurs must do their homework before jumping in – this means asking your franchisor plenty of questions. We have shared a few of these questions below and stress that franchisees need to ask their franchisor these questions in advance of even beginning the site selection process:
1. Will the franchisor sign the Head Lease and sublet the space to the franchisee – or will the franchisee sign the lease alone? Most franchisors want to avoid liability if the franchisee fails; therefore, commonly, the franchisee solely signs the Head Lease. Ideally, the franchisee would want to sign the Head Lease to retain as much control as possible. As a subtenant to the franchisor, the franchisee would be 100% responsible, along with the franchisor, so why not sign the Head Lease yourself? There is no extra protection or benefit for a franchisee to sublease from a franchisor.
2. What role(s) will the franchisor and franchisee play in the site selection and leasing process? Franchisees and franchisors often do not completely define their own roles in the site selection process. Franchisees are often disappointed to learn that some franchisors make real estate promises but do not deliver, shovel off the process to an agent (who may care more about his/her commission than your long-term viability), or even provide next to no real estate/leasing help at all.
3. Will a real estate agent or broker be involved in the leasing process? There are most commonly two types of agents - the listing or inside agent and the outside agent. You will recognize the listing agent as having his/her name on the “For Lease” sign on the outside of the building. This agent’s job is to get the landlord the best deal possible (the highest rent, most deposit etc). The outside agent may or may not be working in the tenant’s best interest. Some franchisors may match their franchisees up with local brokers who find a location and do the deal but ultimately get handsomely rewarded with a commission check from the landlord.
4. Will the franchisee have final say over the location and lease terms? Will you have the right to choose if you find two or three sites for lease? Most franchisors will defer to a franchisee’s wishes when it comes to choosing between two or three sites for lease, but don’t just assume this to be the case. The argument may not be even picking the best site – it might be you trying to avoid a location you hate because the franchisor insists that you lease there. The franchisee takes the risk, signs the lease and pays the rent – make sure you have the power of veto when it comes to site selection.
5. What if we can’t find a good location or reasonable lease deal? Just because you are considering a franchise opportunity, there are no guarantees that you will find appropriate or available vacant space for your new business! Is the suggested rental rate for the commercial property above the franchisor’s maximum recommended rental rate? Will your franchise fee be forfeited if you do not find suitable commercial space?
6. How will my site(s) ultimately be approved or denied? Most franchisors will provide a checklist in advance to be completed on various sites to determine their potential. Desired criteria would include traffic count, demographics, etc. However, not all franchisors will send someone from their head office to negotiate or personally visit your city or site. One franchisor with several hundred locations told us the franchisor did not have the manpower or the money to fly there in person – and that the franchisee was pretty much left on his/her own.