Chicken or Egg Site Selection and Leasing; Which Comes First, Finding a Franchisee or Finding a Site?

For over 15 years, we have been speaking at franchise shows across North America about real estate leasing. Both franchisees and franchisors attend these seminars dealing with lease negotiation, site selection and so on. No matter where we present, two very distinct camps are evident with regards to finding and securing a commercial property. We will use the “Which comes first - the chicken or the egg?” analogy to put this into perspective.

With the “chicken first” approach, franchisors will advertise for prospective franchisees first, and then once the franchisee is secured, begin the site selection process. This site selection process may be done with or without the franchisee’s input.

Why do franchisors use the “chicken first” approach?  This lets them expand and find franchisees in other cities without making any efforts on the real estate side. If no local entrepreneur steps forward in a specific city from advertising efforts, the franchisor will not have to fly and conduct site selection (such flights – whether done frequently or infrequently – can be time consuming, can become expensive and may require additional staff).

With the “egg first” approach, some franchisors will do their real estate development homework initially, secure a site and use that site as a tangible platform from which to advertise and sell the franchise. This can be more work, comes at a greater expense and is done far less frequently than the easier “chicken first” approach.

The “egg approach” to site selection is far more advantageous for both the franchisor and the franchisee. We often receive calls from disgruntled franchisees who bought and paid for a franchise and maybe even went through training camp but are not open for business because the franchisor could not produce a “suitable site” for them. A major franchisor was recently forced to refund over a million dollars to franchisees partly for this very reason.

However, when the franchisee knows in advance what location he/she will be leasing before he/she signs the franchise agreement, there are usually fewer grievances. There may still be complaints if the location is weak. However, these are less common because the franchisee knew in advance where the store would eventually be located and many of the important leasing details (like the size of the store and the rent). In cases where the franchisor has preselected a poor site, the end result will be the same – low sales and an eventual store closure.

With the “chicken first” approach to site selection (where the franchisee signs on before a location is secured) there are numerous downsides and questions:

  • What if no location is found – does the franchisor release the franchisee? What if the franchisee has already quit his/her day job and has been waiting months to open his/her new franchise? This happened to a franchisee who eventually turned to The Lease Coach when her franchisor could not produce a “suitable site.” She had paid her money but was unemployed for almost a year waiting for a site (which, by the way, never did come to fruition and she walked away).

  • What if the site the franchisor produces is weak or questionable or to be located at a great distance from the franchisee’s home? Initially, the franchisee will spend a great deal of time with the new business. The franchisee may consider that increased driving time to reach his/her business will be inconvenient and, in retrospect, would not have signed up with that specific franchise system.

  • What if the location the franchisor selects is too big, the rent is too high or the build-out costs exceed initial projections because of uniqueness to that particular site?

After speaking at the IFA franchise show in Los Angeles, we were approached by an unhappy franchisee who claimed his franchisor was not making a reasonable effort to secure him a site. He had signed the franchise agreement months ago and needed an income from his investment. Furthermore, every prospective site he recommended the franchisor would outright reject. The franchisee was caught in the middle – he eventually broke away from the franchisor and opened his own independent store. None of this needed to happen.

We were hired to speak to a 1000-plus store franchise chain. They had invited us to give several real estate training sessions at their annual conference. Even though the franchisor initially provided some real estate support when the stores were opening, the franchisor did not assist the franchisees with lease renewal negotiations and relocations. This story is relevant as a couple of hundred franchisees own all of those 1000 franchise stores. The easiest way to expand your franchise system is when a single franchisee becomes a multiple store operator. If the initial store or location is weak, it will be more difficult for the franchisee to open more stores.

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