Franchising a business offers many advantages for franchisors (companies licensing their business model) and franchisees (the person buying the franchise).
A company can rapidly expand its brand and market reach without investing significant capital in opening company-owned locations because franchisees fund the new outlets.
Brand recognition and awareness grow as more franchises open, benefitting the company and franchise owner. Franchisees are strongly incentivized to make their business successful since their financial well-being is directly connected to their business’s performance.
Both parties see other benefits from this partnership, too.
- Franchisors earn revenue from initial franchise fees, ongoing royalty payments on sales, and sometimes marketing fees.
- Franchising attracts qualified individuals seeking to be their own boss and recognize the value of getting support and structure from an established brand.
- Franchisors can negotiate better deals with suppliers thanks to increased buying power associated with a more extensive network of outlets.
- Franchisees can contribute fresh, innovative ideas and best practices, sharing them across the franchise.
Keep reading for more best practices on opening a franchised business in a leased location.
Choosing the Location
The first step when launching a new business is finding a good location. You’ve signed the franchise agreement contract, and perhaps the company already has a spot (and building) picked out, but not always. The new business owner and the company usually work together on these challenges, with the franchisee proposing locations and the franchisor typically handling design and permits through local contractors and engineers.
When considering the location, take advantage of the franchisor’s real estate team or recommended brokers who understand the brand’s specific needs and target market community.
- Demographics and Traffic Flow: Conduct thorough market research to identify a location with high visibility, accessibility, and a robust demographic match for your target customers. Examine data on income levels, age groups, and competitor presence.
- Compliance with Franchise Requirements: If the franchisor has specific location requirements regarding size, visibility, or proximity to competitors, ensure your chosen location meets these standards. If you have more flexibility, prioritize locations with high visibility from major roads, when possible, and ample parking appropriate for the business. Consider foot traffic patterns for walk-in businesses.
- Future Growth Potential: Analyze the area’s growth potential and future development plans. Will your current space accommodate your future needs? Also, consider areas with a healthy mix of residential and commercial properties.
Negotiating Your Lease
Partner with a commercial real estate broker or attorney with experience in franchise leases to represent your interests during the negotiations. When you negotiate, consider the following:
- Goal Alignment: Ensure the lease term aligns with your franchise agreement and business goals. Consider renewal options and potential early termination clauses.
- Rent & Operating Costs: Negotiate a fair market rent factoring in property taxes, maintenance fees, and common area charges (CAM). Understand all financial obligations before signing and clearly define who owns responsibility for the repairs and CAM.
- Permitted Uses: The lease should allow the type of business you’re opening and any required modifications/buildouts and operational hours.
- Exclusivity Clause: You may choose to negotiate for an exclusivity clause preventing the landlord from leasing nearby space to competitors of your franchise.
- Exit Strategy: To give yourself flexibility, include provisions for lease termination or assignment to another franchisee if the business underperforms.
- Signage and Branding Approval: Ensure the lease permits the installation of necessary signage and branding elements as per the franchise agreement.
Managing the Build-out and Modifications
Consider hiring a project manager to oversee the build-out process and ensure it stays on schedule and within budget. Project managers can also help you understand the permitting process involved in build-outs and modifications. Maintain open communication with the franchisor throughout this process, especially if any deviations from standard specifications require approval. Also, consider these recommendations:
- Create a Detailed Plan: Collaborate with the franchisor and a licensed contractor to develop a detailed build-out plan that adheres to all franchise specifications and local building codes.
- Manage Cost Estimates and Budgeting: Get detailed quotes for construction or renovations. Consider these costs in your overall budget for starting the franchise. Seek multiple bids from qualified contractors and factor in potential cost overruns for permits, inspections, and unexpected challenges.
- Obtain Landlord Approval and Identify Responsibility: Clearly define who is responsible for building out the space to meet your franchise’s specifications. Obtain written approval from the landlord for any planned modifications.
Navigating Pre-Opening and Launch
While preparing your business’s physical space, you have other things on your “to do” list. Create a comprehensive business plan outlining your financial projections, marketing strategy, and operational procedures.
Verify — or ask your project manager to verify — that your location complies with accessibility regulations for people with disabilities. Obtain all the necessary permits and licenses to operate your business legally.
Develop a comprehensive recruitment plan to hire qualified staff. Leverage your franchisor’s training programs and resources to equip your new team with the skills and knowledge they need about the brand and products to succeed. Train your staff on relevant health and safety regulations.
Collaborate with the franchisor on a pre-opening marketing strategy to generate buzz and build anticipation for your launch. Determine a budget for marketing and promotional activities, and then lean into local advertising, social media, and community outreach to spread the word.
Work with the franchisor to establish an efficient inventory management system, so you have plenty of stock on hand for opening day and beyond, especially if your business will also have an eStore. Implement a system to track key performance indicators (KPIs) as outlined by the franchisor and report data on a regular cadence, implementing their feedback for continuous improvement.
Ongoing Operations
Preparing to open and welcome customers is just the first step in what will hopefully be a long, successful journey. Once you’re up and running, consider actively participating in the franchisor’s support system, attending training programs or regional meetings, and using online resources. Network with other franchisees within the system to share best practices and support each other. Stay updated on industry trends and competitor activity to adapt your strategies as needed. And finally, prioritize delivering exceptional customer service to build customer loyalty and positive word-of-mouth promotion.
Following these best practices and leveraging support provided by the franchisor, a knowledgeable and reliable lawyer specializing in franchise and CRE lease agreements, you can minimize potential risks and set your franchised business up for success.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
