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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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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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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What Is The Total Investment Cost?

By Paul Giggi

Question 1 of 5 in the Blog Series: Top 5 Questions To Ask a Franchisor

If you haven’t had a chance to see our Video on this topic I would like to suggest you do so. For this blog we will focus on Question #1 of our Key 5 questions to ask the Franchisor.

At your first introduction to a Franchisor, there are many questions to consider asking. Some are more important than others in the initial phase as you try to determine if a particular concept and Franchisor is the right one for you to partner with in operating the business.

The first of our 5 Key Questions to Ask:

What is the Total Investment Cost?

You’ll probably come to the table knowing your total available investment capabilities. But to ascertain if you can afford the cost and risk of the venture, you need to understand the Total Investment Cost of the Franchise. Asking the question about Total Investment Cost has many parts to it, so be sure to ask for specifics and fully understand the reply.

Franchisors are governed by the Federal Trade Commission and, therefore are restricted in the detail of the information they can share as they are not allowed to make an earnings claim to prospective Franchisees.  This is to protect them (and you) as you move forward in your due diligence. Without this protection the Franchisor could fall prey to lawsuit liability; if they tell a prospect what they will see as a return and that return is later not realized. It protects you from unscrupulous Franchisors that otherwise might offer false financial promises and information so to entice you to become a Franchisee.

Franchisors are normally going to share with you a range of costs for the complete operations build-out and opening of a single unit. Within this range are numerous items to be sure to understand and discuss. Many of these costs are disclosed in the Franchise Disclosure Document that you will receive as your next step in the qualification and discovery process.

The range offered could be small or large depending on what type of construction (i.e. free standing, end cap, in line, etc.…), the purchase approach (build to suit, your own build, lease, etc.…),  and other important components. When this range is offered to you, if some of these items are not offered immediately, be sure to ask what category the range covers and then discuss the inclusions and exclusions of this range so you have a firm understanding of what additional costs you may have to incur.

Typically, the range will cover your construction costs, FF&E (Furniture, Fixtures and Equipment), permit costs, opening inventory, signage, POS (Point of Sale) systems, opening training costs, opening marketing costs and may even include a certain amount of working capital. There will be more items included and be sure to ask what items are in the range. Also, and as important, be sure to understand what is not in the range.  Often items such as your Real Estate costs and liquor licensing (if applicable) will not be included. Once you have the “all in” figure you are prepared to review the Franchise Disclosure Document (FDD) with a better understanding of the cost areas to target and get a clear understanding.

This question is an important one to fully understand and you may want to consult with those who are current franchisees of a concept or with people who have experience in this area so to be sure you leave no stone unturned in your informational search.

Please check out our Video and watch for future blogs on the other important questions to ask of your Franchisor.

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.