Understanding the Franchisor’s Approval Process

By Paul Giggi

As you research information regarding the franchised concepts you want to consider owning, you will eventually pare down your choices based upon a number of factors.  More than likely, these factors will include the concept’s financial requirements, the available markets, your comfort with the concept, your background in operating the specific type of business and other components we will cover in future blogs.

Once you reach the point of having chosen a concept to pursue ownership with, you will have an initial discussion with the Franchisor; I covered some of the base questions you should plan on asking in a previous blog (click here).

One of those questions was to ask for details regarding the particular Franchisors approval process and hurdles for new franchisees.  This is important area to understand as meeting these hurdles could potentially require an investment in your time and  some sort of financial investment. 

Typically, the approval process will cover the following areas and you should be prepared to discuss them during your initial discussion with the Franchisor:

·       Background & Experience – There may be a requirement of a certain amount of experience in the industry you are investigating or in not direct experience, some background in running a business enterprise.

·       Financial Resources – You will be required to submit an Application covering your background and your financial resources, but this will come up in your initial discussion and you should be one and honest about this important matter.

·       Industry References – If you have a background in the industry you should be prepared to discuss that experience and supply names of people you have worked with that would provide a reference on your experience and successes.

·       Franchisor Financial Hurdles – There are typically minimum Liquid and Net Worth hurdles for financial approval.  The Liquid area is the money that you can readily access and is available for you to invest. This could be cash investment or equity. The Net Worth is the difference between your total financial assets and your total financial liabilities. This speaks to the depth of your financial resources. You should also be prepared to discuss how you will be financial the investment beyond your liquid cash infusion.  If your financial resources do not meet the hurdles or are very close to them, you may not meet Franchisor approval and may want to consider a partner to join in the investment.

·       Personal Financial Resources – Be sure to understand the financial requirements of the concept from the entry fees you will be charged, royalties, build out costs and any costs that are not included in the build out cost range you should receive from the Franchisor. You need to be sure to enter into your due diligence phase with your eyes wide open to all potential costs you will incur.

·       Interview / Discovery Day – One of the requirements that most concept Franchisors will have is you and your partner’s attendance in a Discovery Day. This event is normally held at the Franchisor’s corporate headquarters and is typically a day of discussion.  This event serves a number of purposes. It allows the Franchisor to meet you and you should consider this an interview of you as a potential Franchisee.  In turn, it is your chance to meet the members of the Franchisors staff and the people who will be supporting you and your business going forward… it is your chance to interview them. You should attend prepared with questions of all areas of the support you will be receiving and of the concept itself.  Additionally, in many cases you will have an opportunity to visit one of the concepts that are local… be sure to attend.

We will discuss the Discovery Day in more detail at another time, but this is an important component of the approval / research process and not to be overlooked.

First Step of Discovery with the Franchisor… WHAT TO ASK

By Paul Giggi

There are a number of items to consider when in the discovery phase of a franchised concept that we will cover in more detail in coming articles. This message will focus on your planning for your initial discussion with a Franchisor and preparing your questions… what ground should you be sure to cover in this first conversation?

I suggest you give yourself time for this discussion and ask for an hour.  You may find you don’t need this much time but you want to assure that, if you do, the Franchisor is ready to spend that amount of time with you in discussion.

·       Plan your discussion.  If you have partners sit down and discuss the information you need addressed to commence your discovery process of the concept.  Be sure to make a list of questions and identify the key areas you need information.

·       Make a visit.  If possible, visit an operating location of the concept and watch it run.  I would suggest you introduce yourself to the manager of the location you visit and explain your interest; request if they have time to explain how the concept operates.  You will find this very helpful as most people operating a restaurant want to help others and are willing to share their successes and challenges.

Your list of questions for the Franchisor discussion needs to include, although does not be limited to, the following areas:

·       Average Unit Volume (AUV): This is the current average annual sales that the concept is experiencing across all of their operating locations.  This should include the Franchisor operated locations as well but be sure to ask this as not all may do this and have the franchisee average only.

·       What is the Total Cost of a Site to be developed?  This one can be complicated and we will delve into details in the future,  but simply it is the cost of from start to opening of the development of a single location.  Typically, the Franchisor will offer you a range of cost which will represent the range of experience of cost to build a site. You should ask for the details of this number as there will be exclusions in some cases that you need to consider when building your investment model.

·       Available Territory.  Be sure to understand if the area you are interested in building is available for development or already owned by another party.

·       Support offered.  This is an important topic… be sure to understand the general detail of what support you can depend on from the Franchisor and to what depth in each support discipline you can expect assistance.

·       Be sure to inquire what other financial operating information the Franchisor is willing and/or able to offer you at this time. It may be that the Discovery Day would be the next time you can get more financial data but whatever you can obtain initially will always help in your decision process

·       Financing Options. What assistance does the franchisor offer whether direct, third party or no assistance?  This is important as you begin your search for a lender.

·       The development and Approval Process.  Be sure to fully understand the Franchisors process from your first call through to Franchise Agreement and the hurdles of approval they are measuring in Franchisee prospects. One of the items you should address will be your attendance to a Discovery Day.  This is an important step in your discovery process as well as with the Franchisor so be sure to get the details on this event and plan to attend, this is the meeting that will give the Franchisor the opportunity to meet and understand you and your partners as a part of their approval process and will give you an opportunity to evaluate the Franchisor as well… to understand who this group is and if you get a sense that you are comfortable partnering with the Franchisor going forward.

There are many details to these questions we will cover in future articles but this is an outline of your initial questions to start your journey to agreement and development of a franchised concept.

 

 

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. 

 

 

Market Development Planning

Some franchisees or small business owners plan to open multiple units. If your goal is to be a multi-unit developer of a business, you’ll want to put together a market development plan or MDP. A MDP enables you to strategically look at a market and decide where you can locate each of your units to maximize profit and minimize cannibalization. Cannibalization in this context, means competing with yourself across two or more units for the same sales. Take a look at the diagram below:

This graphic shows three possible areas that fit  model criteria. The radii in the above diagram represent each location’s (A, B, and C) nominal trade area. If I develop location A, I cannot construct location B without cannibalizing location A. I can however, develop location C and location A without any significant cannibalization.  I could also construct location C and location B with no cannibalization. 

How Many Bids?

I often get asked for contractor recommendations. I usually provide a short list of contractors that I’ve worked with in the past with success, or whose thorough work quality I’ve witnessed firsthand. When I hand over the list, the next question usually is: ‘Should I contact all of these?’

The answer is more complicated than a yes or no. Some contractors on the list only do work in certain states, some specialize in certain states. Some are headquartered far away from the project site, and would charge for travel to and fro. Some work with unions, some do not. These facts will usually filter down the list to three or four contenders that you can call and talk to about your project.  After that initial contact you should have a feel for the various companies, their ethos, timelines, and whether or not they’d be a good fit for your project.

Generally, my recommendation is to get bids from 3 contractors. Getting 3 bids allows you to make an informed decision on project costs and timelines. Plans get distributed to the contractors at the same time they are initially submitted to the city or county – the plans submitted to the contractors are called a bid set. A good and thorough contractor will take about three weeks to turn a bid around to you. By this time you are close to getting your first round of comments back from the building department (and/or health department if you’re permitting a food use). Barring any substantial comments by the departments, you should have a pretty good idea of the project costs.

I see many franchisees that go with the cheapest bid. But, be sure you are comparing apples to apples. Below are some other items in the bid to consider:

  • Timelines – if a project schedule isn’t provided in the bid, ask for one. Can one of the contractors get you to your opening date a few weeks earlier that the others? Quantify your projected weekly revenue and determine if there’s a decent return.
  • Weekend work – some construction companies work weekends or have provisions for weekend work in the event of weather delays or other unforeseen delays.
  • Dedicated workers on the project – will your project have a designated onsite super? Make sure there is someone to hold accountable if your timeline extends past the projected completion date.
  • Itemized vs lump sum bids – Some contractors will categorize items as ‘lump sum’ while others will categorize that same item as an ‘each’, ‘cubic foot’ or for whatever the situation calls. If you see ‘lump sum’ on one bid and ‘each’ on another, ask questions. There could be some hidden or padded costs in the lump sum designation.
  • Equipment Install – Many times a contractor’s bid will include installation of food service equipment. Be aware that your food service company will likely have a line item in their bid for this service as well. Don’t pay for it twice!

Get Your Permits Faster

Within the Development Process there are three phases that give timing experts a great deal of heartburn: site selection, lease execution, and permitting. These particular phases of the process present variables that can be difficult to schedule against because they depend on elements you cannot control.

Site selection, or the availability thereof, is a function of the market. If we’re in a sellers’ market, then demand is high, supply is low. This makes it harder to find good real estate. The harder it is to find, the longer the site search.

The push to get a lease executed can also be a long road. The road is certainly shortened if you have a detailed (but not too detailed) LOI, but from a timing perspective, you’re at the mercy of the Landlord or signatory. If the decision maker or his attorney decide to go on vacation for a week during your lease negotiation, you’ll have to wait a week for him/her to return.

The third variable is permitting. By the time you get to the permitting phase, you may feel like you’ve been beat up by the development process, you may have some new gray hairs, or have forgotten what is like to get a good night’s sleep. Permitting can be stressful; you now have outside parties looking at your plans, sometimes demanding that you change elements of your design. I’ve lost many nights sleep over permitting deadlines, but I’ve also learned ways to mitigate the timing unknowns. Below are some ideas that will cut down the time it takes to pull your permits.

1)      Schedule a Pre-Application Meeting with the agency that will be reviewing your plans. My first interaction with the AHJ (agency having jurisdiction) usually occurs in the Due Diligence phase. I’ve already talked to these folks once, maybe twice to make sure that my proposed use is permitted in this shopping center, in this area of town, in this PUD, etc… Once my lease is out for signature, I call up these same folks and ask for an in person Pre-Application meeting. It may take a week or two to get this informal meeting scheduled. By this time, I’ve usually chosen which architecture and/or engineering firm I’d like to hire, and I ask them to attend the Pre-App with me. During the Pre-App the AHJ listens to a brief description of the project; the rest of the meeting is them telling you what you need to do to get your permit. Ask them if there are any activities you can run concurrently or if there is any special criteria about which your arch/eng should be made aware. Ask them how long it usually takes to get through permitting based on your use and their workload. And above all, be nice.

2)      Hire an Expeditor to walk your plans through the permitting department(s) for you.  Expeditors come in various forms. Some contractors can act as expeditors. Local architectural firms can also act as expeditors. Even if you are running your plans through a non-local arch firm, a local firm can take on an ‘expeditor scope’, and for a fee, be your local face. I’ve personally had a lot of success with this method. Since the AHJ already knows the local players, they are usually more apt to pick up the phone or respond faster. Local firms also know the loopholes and what obscure items can speed up the paperwork.

3)      Purchase an Expedited Review from the AHJ. This service isn’t offered by all agencies. Basically, you pay a fee to get your permit application moved to the top of the pile.

4)      Ask the Landlord for help with permitting. If the space or center you’re considering is newly built, it’s likely that the Landlord has relationships established at the City or County. Ask the Landlord to come to your Pre-App or make an introduction to the team he worked with to get his center permitted. Since the Landlord wants to collect rent from you as soon as possible, he/she will be more than willing to help you, especially if all they have to do is make a few calls.

5)      Hedge – I only recommend this measure if you are experienced in project management or if you’re up against a deadline (like paying rent before you’re open). The decision to hedge happens earlier in the development process. It puts money at risk by starting your plans before your lease is executed. If you know that permitting will take longer than you have or than you want, starting your plans before lease execution can pick up some time. Essentially you’re running the lease execution and plans generation activities concurrently. You’ll get open sooner, but because you’re starting plans before lese execution, the money that you’re spending on the plans is at risk. In other words, if the deal falls apart, you’ve lost the money you’ve spent on the architectural and/or engineering plans. Be reasonable sure that the deal is material before employing this method.

 Have you tried any of these methods? Join the conversation!

Who Should Pay the Impact Fees?

In a sellers’ market, like the one we’re in now, negotiation for leased space gets tough. Landlords grant far less concessions on a deal than they did just a few years ago. Inventory for well positioned space is low, demand is high. In the race for space, prospective Tenants sometimes agree to pay for items that they normally would not, such as items that are traditionally supplied by the Landlord.

There’s a catchy adage attached to what items Tenants’ believe are the Landlords responsibility to tender. It goes ‘If it stays, the Landlord pays’. Utilities, structural improvements, and necessary ancillary services (parking lots, etc) are among these items – they ‘stay’ with the space after the Tenant leaves. BUT there is another, sometimes large ticket item, one that rarely gets brought up at the initiation of a deal – impact fees.

Impact fees are imposed by the city or county; as such the rates vary from county to county, from city to city. They are called many things. They are hidden under names like, reservation fees, sewer capacity fees, meter fees, connection charges, tapping or tap-in fees, EDU fees, availability fees, the list continues.

In some cases these fees are zero or negligible. Sometimes there is a moratorium, but in many cases impact fees are an unforeseen cost that blindsides the Tenant when they go to pull their building permit. Some building departments will hold your permit hostage until these fees are paid in full. I’ve personally seen impact fees across the board. I’ve seen some impact fees as high as $300,000 in parts of Maryland attached to the use of a patio. I’ve seen some in Florida that we’re $5,000. I’ve seen some that were $300. It really depends on the location of your project.

If you’re interested in a space, especially if you’re going from one use to a more intense use (for example going from retail to restaurant) inquire about impact fees. Ask your broker to vet this for you. Since these ‘impact fee credits’ (they become credit as soon as they are purchased) stay with the property, they are assets to the Landlord. Get language into your LOI that makes any payment of impact fees or like charges, the responsibility of the Landlord. If this item becomes a negotiation point, be sure that you know the valuation, that your broker or architect has inquired about the dollar amount due and when that amount is due.