What Help Do Franchisors Provide Their Franchisees in the Way of Leasing Commercial Space?

Potential franchisees should take a lesson from cautious pedestrians who look both ways before crossing the street. Before paying a substantial franchise fee, make sure you understand what real estate help your franchisor will be providing – and what not.

Please don’t get us wrong! As we state in our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, we are firm supporters of the franchising concept … there are many existing franchises which are very successful as they have a strong product / service as well as the right people in place. We have found, however, that many franchisors can often fall short in the area of real estate help (specifically in the regards to site selecting and lease negotiating). Finding the right location is vital to a franchisee’s success or failure; however, this crucial step is not always given due consideration. With writing this article, we simply want to stress that, when it comes time to finding space for a franchisee, franchisors may only offer limited assistance due to lack of time, money and resources. Furthermore, a franchisor may or may not have an in-house real estate department which is dedicated to helping franchisees with these matters.

When it comes to offering real estate help, there are, essentially, three main ways that a franchisor can support a new franchisee. These are summarized below:

1. The franchisor will conduct site selection, secure and lease the location and then sublease the unit to the franchisee. With this arrangement, the franchisee is obligated to accept the chosen location; however, he/she does not accept final responsibility for the lease. The franchisor, having signed the “head lease” for the location, will ultimately be liable. Should the franchisee struggle or pull out entirely, the franchisor will often try to resell the business to a new franchisee.?2. The franchisor or its area manager/developer will conduct site selection but will leave the lease negotiations to the franchisee. Typically, franchisees have little or no experience with these matters – they may be lucky to negotiate a commercial lease once or twice in their lifetimes, while savvy agents do this every day for a living. This can be comparable to a novice facing a master in a game of chess. The franchisee may well enter into the process unprepared and neither asks the right questions nor negotiates effectively. As a result, that franchisee can blindly agree to an inappropriate lease term, accept too much commercial space for his/her actual needs and/or miss out on receiving valuable tenant inducements paid by the landlord (including tenant allowances, build-out assistance and/or free rent).

2. The franchisor or its area manager/developer will conduct site selection but will leave the lease negotiations to the franchisee. Typically, franchisees have little or no experience with these matters – they may be lucky to negotiate a commercial lease once or twice in their lifetimes, while savvy agents do this every day for a living. This can be comparable to a novice facing a master in a game of chess. The franchisee may well enter into the process unprepared and neither asks the right questions nor negotiates effectively. As a result, that franchisee can blindly agree to an inappropriate lease term, accept too much commercial space for his/her actual needs and/or miss out on receiving valuable tenant inducements paid by the landlord (including tenant allowances, build-out assistance and/or free rent).

3. The franchisor or its area manager/developer will conduct site selection but will leave the lease negotiations to the franchisee. Typically, franchisees have little or no experience with these matters – they may be lucky to negotiate a commercial lease once or twice in their lifetimes, while savvy agents do this every day for a living. This can be comparable to a novice facing a master in a game of chess. The franchisee may well enter into the process unprepared and neither asks the right questions nor negotiates effectively. As a result, that franchisee can blindly agree to an inappropriate lease term, accept too much commercial space for his/her actual needs and/or miss out on receiving valuable tenant inducements paid by the landlord (including tenant allowances, build-out assistance and/or free rent).

4. The franchisor will delegate the leasing process to the franchisee to find and lease his/her own location, often referring him/her to a broker. This is, typically, the worst scenario for the franchisee. As mentioned, a franchisee may be inexperienced in such matters and not know exactly what to look for. You’ve likely heard the adage, “location, location, location”; there are many elements involved with making the best decision.

To further illustrate these points, allow us to share a couple of real-life stories with you. As The Lease Coach, we were recently invited to conduct a leasing webinar for a recognized franchisor. When communicating with the webinar participants, we found that nine out of 10 of the franchisees listening in on the session were disgruntled with the level of help initially received from the franchisor. While we are unsure as to what the exact issues were, it seems apparent to us that there was a lack of communication, leaving expectations unfulfilled. In another instance, we were speaking with a franchisor about several matters and took the opportunity to ask, “How do you find locations for your franchisees? Do you have an in-house real estate department dedicated to this task? Do you phone brokers to work with your franchisees? Can you help a franchisee wishing to open in a distant city, where you are not located?” The franchisor answered, “No, we don’t have the time, manpower or money to travel to each city that we sell a franchise in.”

When it comes to buying into a franchise system, it’s a case of “buyer beware”. While your selected franchisor can – and will – provide name recognition, a proven track record, full-scale training and so on, you may receive only limited (at best) assistance with your leasing needs. By looking both ways before crossing the street, asking the right questions and consulting with a professional and experienced Lease Consultant, you can better protect your own financial investment.

For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to JeffGrandfield@TheLeaseCoach.com.

Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.