What Your Franchisor Doesn't Do for You
With their recognized names, training programs and proven business concepts, franchises can be very appealing investments for entrepreneurs. Before you commit to a franchise concept, however, understand that franchisors may not handle all aspects of the process required to open your business. Where they often fall short is with commercial real estate matters – specifically in the areas of site selection and commercial lease negotiating – these are frequently left to the unsuspecting franchisee to handle.
As The Lease Coach since 1993 and now co-authors of our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, we have explained this to many prospective franchisees and helped them choose the best business location and negotiate their commercial lease for their maximum benefit. When you are considering various franchise concepts and before obligating to any long-term lease commitment, consider the following advice (excerpted from our book).
The majority of commercial lease deals are five-year lease terms. However, exceptions to a five-year lease term have become more and more commonplace. A lease term can be stated in either years or months. It’s important to factor in the start date and the expiration date of the lease term relative to what’s best for your business. Franchise tenants should make sure that their lease term matches their franchise term to avoid issues later with the lease running out too soon. This happens when the start date of the franchise agreement is prior to the start date of the lease agreement – which may be several months later, when the franchise business actually opens.
Prospective franchisees are banking on a proven brand for their success, but finding the perfect location for a franchise concept can still be quite challenging. One pizzeria franchisee told us there was such fierce competition for good pizzeria sites that as the tenant, they didn’t negotiate the rental rate and simply agreed to whatever deal the landlord wanted. This was not an isolated incident but in many market places the franchise tenant can still get a great lease deal if they get some professional help from a lease consultant.
If the franchise concept you’re buying into has a site criteria list, ask for it, and make sure you use it or include it in the leasing process. For example, a franchisor may stipulate that a good location is dictated by certain factors, such as age, population density, or income levels. A high-end frozen yogurt concept may do better in a more affluent or touristy area, for example.
The depth and experience of the franchisor, along with the brand and name of the franchise concept, may open leasing opportunity doors for you that would be difficult to crack as an independent tenant. The fact is, for new developments, most landlords strive for up to 100 percent national and regional chains and franchise tenants. Obviously, the brand-name recognition of a franchise can influence a landlord’s interest in you.
Some franchisors are active in the site selection and lease negotiation process, but far too many simply introduce the franchisee to a local broker who supposedly works for the tenant. The problem is that the broker or agent is usually collecting a commission from the landlord. From most landlords’ perspectives, any and all agents or brokers who are receiving a commission from the landlord are supposed to be serving the landlord’s best interest, not the tenant’s.
As a further note, in the franchise industry, the franchisor or the franchisee could sign the “head lease” with the landlord. By doing so, either party becomes the “head tenant”. Whoever signs the head lease maintains more control but will, conversely, spend more time on management issues including paying rent directly to the landlord and complaining about leasing issues.
Much like driving a car, maintaining control is an important factor. Whoever is behind the wheel is in the best position to steer the vehicle to a desired destination in a safe manner. Carrying this analogy further, franchisees holding the head lease are better protected with their investment. Should a royalty payment or two be missed, the franchisor cannot threaten to take the space over. Often, the franchisor completely controls and dictates the site selection process; however, a franchisee signing the head lease has much more say in the location selection. Should a franchisee with a head lease wish to ever sell his/her franchised business, this is a far simpler process requiring a lease assignment.
Franchisors often carry more weight with landlords and can negotiate favorable amounts of landlord’s work, leasehold improvement allowance, free rent, no deposit and so on. Note that not all franchisors will pass these benefits on to the franchisee.With a franchisee signing the head lease, any such inducements made can be to the franchisee’s benefit.
One reason that franchisors would have for being on the head lease would be to position themselves to re-open or resell that location and franchise if the existing franchisee closes. We have seen franchisors make a tremendous windfall by repackaging a failed franchisee location and reselling the entire space - including equipment and leasehold improvements - to another franchisee that is not aware of a previous franchisee’s history in that location.
It is not uncommon for the franchisor to require the franchisee to include in the lease agreement an exhibit or list of terms giving the franchisor limited rights in the event that franchisee defaults on the lease agreement.
With a franchisee signing the head lease, the franchisee can control the real estate. This article does not provide enough space to examine all of the pros and cons of head leases, subleases and franchisee direct leases but, at least, the topic is now on the table.