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.



How Dare You!?

Sometimes development can get heated. Blood pressures rise, adrenaline kicks in, ego comes out. Recently I was privy to one of these exchanges. The topic: a radius restriction.

“How dare you tell me that I can’t open another restaurant!?” Jason said. His face was visibly red. Jason tapped his class ring firmly on the table and waited for the Landlord to respond. He stared at the speakerphone waiting for the Landlords reply. “Jason, your lease with us clearly states there’s a radius restriction.” Alex said in a matter-of-fact tone. “You can’t build another {restaurant} that close to the one in our center.” Alex is the Landlord of a very successful lifestyle center in which Jason has an over-performing, and very popular restaurant. So popular, in fact, Jason has started looking for a site to open a second location. Jason’s pick for location number two is approximately 3.5 miles west of his opened restaurant. “Alex, this new site is over three miles away, there’s no way you can tell me that I can’t open another restaurant three miles away!” Jason said clearly frustrated by what Alex said. “Actually Jason, I can. It’s in your lease with us. Read the lease. There’s a radius restriction in your lease!”  Alex said sternly. The room and the speakerphone fell silent. Jason flipped through his lease to the section Alex had referenced in a previous email. “So you mean to tell me, that I can’t build anything within five miles?” Jason said testing the waters. “Yes”, Alex said. “Five miles, as the crow flies.” Uncomfortable silence ensued. Alex was the first to speak again. “This is tied to your percentage rent clause”.

So why do Landlords impose radius restrictions? Generally radius restrictions and percentage rent clauses show up to the party together. If the Landlord is banking on the collection of percentage rent, and will be sharing in your upside, a radius restriction will protect that collection from your own cannibalization. In dense trade areas, radius restrictions can inhibit your growth strategy. Before you agree to a radius restriction, make sure you map out the extents of the proposed radius so you understand the boundaries. If you’re part of a franchised organization, compare the radius the Landlord is proposing as a radius restriction, to your development boundaries outlined in your franchise agreement.

As with most items in your lease if you knowingly act in conflict, you could be placed in default. If you defy your radius restriction you might be liable for ‘damages’ or for any perceivable loss in the collection of percentage rent.


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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!