Seven Questions to Ask Your Franchisor Before Leasing Commercial Space
Many future franchisees think that when they join a franchise system, the franchisor will complete everything for them. Think again!
Many franchisors often do not have the time or resources available to them to assist their franchisees with commercial real estate matters (eg: site selecting and commercial lease negotiating). Therefore, franchisees should clarify with their franchisors that help is available and at what level. They can do this by asking a number of smart questions including the following (note that all of these questions must be asked in advance of even beginning the site selection process):
1. What role(s) will the franchisor and franchisee play in the site selection and leasing process? One reason why so many franchisees get upset with their franchisor is the lack of defined roles each party will play in the process. Some franchisors truly provide next to no real estate/leasing help at all. While other franchisors say they will handle most of the leasing process many do not deliver. Alternatively, other franchisors may shovel the process off to a real estate agent who may care more about his/her commission than your long-term viability.
2. Will the franchisor sign the Head Lease and sublet the space to the franchisee – or will the franchisee sign the lease alone? Whoever signs the Head Lease will assume the responsibility for the lease. Most franchisors want to avoid liability if the franchisee fails; therefore, more often than not, 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.
3. Will the franchisee have final say over the location and lease terms? Most franchisors will defer to a franchisee’s wishes when it comes to choosing between two or three sites for lease. Confirm that you have that right. 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.
4. 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.
5. What if we can’t find a good location or reasonable lease deal? We remember one young couple who approached us after we spoke at a franchise show. They had just signed up for a franchise and knew several plazas in their community that would be perfect for their concept. They wanted us to negotiate one of these locations to a completed lease. Unfortunately, upon investigation all of these plazas were achieving rental rates 25-30% above the franchisors maximum recommended rental rate. Frustrated, they forfeited their franchise fee because suitable space was not available. Don’t assume that just because you buy into a franchise system there will be vacant space available or a landlord waiting to take you in at a rental rate you can afford.
6. Who is responsible for reviewing all lease documents? An entrepreneur in California decided to buy a franchise and recruited our assistance with the leasing process. We have to admit that the franchisor was both knowledgeable and ready to help at some levels; however, this did not include the lease document review. Another tenant called us in frustration after paying a lawyer over $20,000 to do his lease. Franchisees may mistakenly think that since the lease is a legal document they need to use an attorney. Pretty much all lease documents are legal – it’s the business terms or moving parts within a lease document that need to be negotiated.
7. 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.