Lease Basics For Franchisees

Lease Basics For Franchisees

 

Today’s blogpost is about leases. Along with your franchise agreement and perhaps a personal guaranty, your lease is a contractual document that will be with you throughout your journey as a franchisee. In fact, many leases are written to mirror the franchise agreement in initial term and option duration. In today’s post, I’ve put together 5 important clauses that you’ll find in your lease. Make sure you familiarize yourself with these clauses before you execute your lease agreement.

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5 Things You Should Include in a Letter of Intent

5 Things you Should Include in a Letter of Intent

Most franchisees and/or small business owners lease space for their business. In this post we’re going to cover 5 basic clauses to make sure are in your Letter of Intent. These clauses are important to negotiate up front in your Letter of Intent so that you don’t waste your time, resources, and give up your leverage negotiating them when you get to the Lease.

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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 1

By Paul Giggi

Today I’m here to talk about things that I’ve done in the past that haven’t worked out so well. I’d love to stand here and share my successes, but I’d probably bore you to tears, hearing me either talk about things that I have done, that if I had the chance, I would do differently. So the one experience that I want to share with you today has to do with the area of site selection.

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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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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. 

Tenant Improvement Allowance – A Shell Game?

I have many franchisees ask about Tenant Improvement Allowance. It almost sounds too good to be true to those that are just stepping into the world of Real Estate. “You mean the Landlord is going to give me money to help me physically build out my space? Wow! What a good guy!”

The concept of Tenant Improvement Allowance, sometimes called TA or TIA, isn’t about the Landlord doing you any favors. Many call it a ‘shell game’ because it can be used as a way to raise the base rent. In which case, you are essentially financing these ‘free’ improvements through, not only the initial term of your lease, but any future options you exercise.

That being said, TIA can help out those entrepreneurs that start out with only a small amount of capital. It’s a real balancing act. Too much TIA and your base rent is inflated. Watch out for this scenario when a Developer is about to flip the property. To make his or her balance sheet look better with large rent numbers, they’ll flood you with cash up front. Be smart about it. You’ll be paying the inflated rent for 5 or 10 years; this time period can be long enough for you to have paid the original TIA amount back 3 fold.

How Much Should I Be Paying In Rent?

I often get asked ‘How much should I be paying in rent?’. The rule of thumb for a restaurant is based on your projected sales. Your all in rent ceiling should be no more than 6% to 8% of your gross sales. 

An example of this is as follows:

Lets say you have a 3,500-sf space at an all in rent of $20 psf. Your annual rent for this space is $70,000. Lets also say that your restaurant is projected to do $1,000,000 in annual sales. Your rent ceiling would be equal to $1,000,000 (8%) or $80,000 per year. In this example, the proposed rent is lower than the rule of thumb, so judging by industry standards and assuming your operating your restaurant efficiently, this rent rate is manageable.