Franchise Store Closings

Why Do Franchise Stores Close?

It’s the elephant in the Discovery Day Boardroom; Franchise Unit Closures. The Franchisor may not even bring up the fact that there have been store closures under their watch, but it’s important for you as a potential buyer to find out how many and why. In today’s post, I’m going to cover:
1) the reasons why a franchise store may close, 2) how closures reflect on the brand, and 3) at the end of this post, I’ll discuss a metric tied to store closings that can help you reduce your risk when choosing a franchise.

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10 Steps to Opening a Franchise

In this Blog Post, I’m going to share with you the 10 Steps to Opening a Franchise.

Opening up a franchise or any small business can be daunting. There are hundreds of tasks that need to be completed most, within a certain time-frame. Risk increases with ignorance and to that end, its important to understand the big picture, the context of the entire sales and development processes. In this article I’ve outlined a high level overview of the how to open a franchise unit. Its important to note that this post is intended to be a road-map. The specific how-to’s for each task will be covered in a separate posts.

With just a few exceptions, this process can be used to open any small business.

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What I Would’ve Done Differently – Episode 2

By Tiffany Toliver, P.E.

This story starts in the suburbs Atlanta, GA. I was working on a pad-deal in a prominent lifestyle center. The LOI was fully negotiated and executed and I was waiting on a lease draft from the Landlord. During this time, I had a local engineering firm doing some code research on the site so that I could accurately estimate a project schedule and permitting costs.

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The 4 Elements of Site Selection

By Tiffany Toliver, P.E.

These four elements of site selection are pretty general; they will work for almost any franchised concept. And If you apply this structured way of analyzing real estate to your specific use, whether that be restaurant, retail outlet, entertainment venue, whatever, you’ll be able to compare sites apples to apples. This will help you make an informed decision rooted in data.

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FAQ: Lease Agreements for Franchise Operations

By: Tiffany Toliver, P.E., LEED AP

I thought I’d take a few minutes and answer some of the frequently asked questions that I get regarding lease agreements for franchised operations.

Q: How long should my initial lease term last?

A: Typically, 10 years; though this answer is not in a vacuum. Consider your ROI, the amount of Tenant Improvement Allowance you are receiving, and finally the length of term in your Franchise Agreement.

Q: Is this a good rent rate?

A: This is also a question that begs several other questions. What is included in that rent number? Are you getting your full work letter for example? Are there rent increases? Are you getting any money for Tenant Improvement Allowance? What is the market rate? What is your ceiling? (based on your projected EBITDA). Having the answers to these questions will help you determine whether your rent rate is appropriate for the trade area and for your operation.

Q: Who should pay the brokers commission?

A: Typically, this is paid in full by the Landlord. However, look for it to be baked into the rent number in some way. Don’t let this concept diminish the role of the broker. A good broker will be able to get you a lower rent rate than if you were to go it alone. They also have their ear to the ground about upcoming projects that aren’t on the market yet.

Q: My building permit is going to cost me in excess of $5K. Can I get the Landlord to pay for this?

A: No. Unless you’ve worked out a ‘turn-key’ deal in the LOI stage.

Q: Do I really need a Real Estate Attorney to review my lease?

A: In my opinion, Yes. Remember that you are signing a contract for a span of 10-years. The money spent on a Real Estate Attorney to review the lease, is money well spent.

Q: Can I just wait and negotiate renewal terms when my lease expires?

A: Technically yes, but you run the risk of the Landlord increasing your rent at a rate that compromises your ROI. Worst case, the Landlord can choose not to renew your lease at all.

Q: Am I bound by an executed Letter of Intent (LOI)?

A: No. An LOI is a ‘Gentlemen’s Agreement’. You cannot be taken to court for backing out of an LOI. You can, however be taken to court for breach of an executed (contractual) Lease Agreement.

Q: I found out the business owner next to me (same center) has a better rent rate. What can I do?

A: Check your lease. Make sure that you are paying the correct rent rates, CAM, Insurance rates, etc. If a meaningful discrepancy in rent rates exists between you and your neighbor, go and talk with the Landlord. Keep an open line of communication and try to come to a compromise.

 

Do you have a question regarding franchising that we can help you answer? Please ask us here and we’ll get back to you!

 

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Can I Walk Away from a Signed Lease?

By Tiffany Toliver

In the development world, the word ‘contingency’ has several meanings. The most common use for the word ‘contingency’ applies to construction budgets. A contractor will set aside a certain percentage of the cost of the entire project towards a contingency category. For example, if the construction cost of the project is estimated to be $1,000,000 then a contractor may set aside 10% of that or $100,000 for unforeseen circumstances.

Another use of the word ‘contingency’ is in regards to the LOI or lease language – that’s what I’ll be expanding upon in this post. A contingency, in this context, is a way for one party to be able to exit the deal if certain agreed-upon criteria are not met. For example, in a typical deal, I’ll always ask for a permit contingency. The language will go something like this:

                “Tenant’s obligations under the lease shall be contingent upon Tenants receiving all applicable building permits, licenses, and other documentation necessary to open and operate Tenant’s Permitted Use.”

A permitting contingency is the most basic of contingencies. It allows the tenant to walk away from a signed lease if he or she is unable to obtain a permit for their specific use. There are other contingencies that could be inserted into an LOI. Contingencies associated with the adequacy of public water or sewer, or permitted-use parking are very common. Usually, the Landlord or developer will counter a Tenant’s contingency with an expiration for which you, the Tenant have to complete your due diligence. They may give you 30 days, for example, to vet out for yourself whether there is water and sewer, or adequate parking. If a contingency expires, it is considered to have been automatically waived. Many times the landlord will hinge the contingency expiration time frame on the day that you execute the LOI. A more advantageous play is to hinge the time frame on the execution of the lease.

Another type of contingency found in the lease language is a financing contingency. If you are able to work this contingency into your lease you’ve won big. In today’s market many Landlords and Developers sneer at a financing contingency as it basically allows you to walk away if you cannot get financed from the bank.

Contingencies can go both ways. In the preceding paragraphs,  you read about the Tenant’s imposition of certain contingencies. Likewise, Landlords and Developers can have their own set of contingencies. For example, a landlord may make the lease contingent upon the review of tenant’s financials or the recapture of the premises from an existing Tenant.

Any and all contingencies should be negotiated in the letter of intent as they are an integral piece of the project timeline and a measure of risk on both the Tenant and the Landlord side. They allow a specified and agreed-upon timeframe to perform necessary due diligence.

 

 

How do Commercial Real Estate Brokers Get Paid?

Brokers are a valuable resource. I often get asked for details about how they get paid. 

Let’s work through an example of how brokers are paid by commission:

A franchisee has agreed to rent a 4,000-sf space at a rental rate of $25 per square foot. The annual total is calculated by multiplying the square footage of the space by the rental rate:

Annual Rent = 4,000 sfx$25.00 psf                                                 

Annual Rent = $100,000

The landlord and the franchisee agree on an initial lease term of 5 years. Multiply the Annual Rent by the number of years in the initial lease term:

Rent Total for the Initial Term = $100,000×5 Years

Rent Total for the Initial Term = $500,000

Brokers’ commissions are usually 6% of the Rent Total for the Initial Term. Multiply the Rent Total for the Initial Term by 6%

Total Brokers Commission = $500,000

Total Brokers Commission = $30,000

The Total Brokers Commission is typically split between the landlord’s broker, and the tenants broker. Each broker gets 3%. Divide the Total Brokers Commission by 2.

Landlords Broker + Tenants Broker Commission = $30,000

Landlords Broker Commission = $15,000

Tenants Broker Commission = $15,000

If either Broker is a part of a brokerage house or partnership, their commission is split even further.

The Power of a Good Broker

Sage advice in site selection: use a commercial broker that lives in the subject market. There are usually two brokers involved in each transaction; a broker representing the Landlord, and a broker representing the Tenant. It is a common mistake for small business owners and franchisees to forego their representation – to just use the Landlords broker. The reasoning is that they believe they can save money on a deal if they go it alone. What they’re not considering is the value that the Tenant-broker brings to the table. Some of the services that brokers provide are trade area intelligence, current market rates, comparable establishments in the immediate area, a buffer in negotiation with the landlord, utilization of a network, experience with different uses, and the ability to get sales data from direct or indirect competition. They will also save you time by turning up multiple opportunities at once, producing heat maps based on your choice demographics, chasing down the answers to your site specific questions, and hosting you on a thorough site tour of the market.

You should spend some time with your broker before they scout any real estate for you. Make sure the two of you are a good personality fit. You’ll be working with them often throughout the lifespan of the deal. Provide them with information on your brand and your target customer. If you, or your Franchisor (if applicable) have certain site criteria, be sure to let your broker know beforehand so that you don’t waste time looking at sites that will not work for you.