For some first-time franchisees, the initial costs associated with the real estate of their new business presents a financial challenge, especially to working capital. By eliminating such risks as site selection, financial negotiations, legal review, architecture, and general construction, experienced real estate professionals ease the path for new franchise owners eager to launch their dream. Here are 10 key points to consider:
Step 1 SITE SEARCH AND SELECTION
Location quality, reduction of start-up costs, and profitable rent-to-sales ratios represent capital return on investment. To ensure the highest ROI, it is important that a franchisee compare its top three locations, the projected annual revenue of each location, the approximate start-up costs and net operating income to decide which location will yield the fastest return on capital and the highest annual income.
Step 2 LANDLORD CAPITAL IMPROVEMENTS
The condition of property is a baseline agreement determined during a detailed interior walkthrough with a site survey checklist. One of three conditions will exist: a "cold dark shell," in which the landlord invests in capital improvements to bring it up to a rentable "vanilla shell" at its sole cost; a pre-existing space a landlord demolishes and restores back to a vanilla shell at its sole cost; or a vanilla shell--a landlord delivering a space as a complete white box up to code and ready for occupancy.
Properly defining the condition of property as a baseline of negotiation, and knowing what to say (or not say) on a walkthrough with the landlord's listing agent, can lower costs on landlord capital improvements, sometimes up to $100,000.
Step 3 FINANCIAL NEGOTIATIONS
Verbal negotiations between the landlord's agent and the franchisee's agent represent soft and hard capital savings opportunities: lease term, capital improvement, buildout time, rent abatement, discounted market rent, reduced annual increases, among many others. These capital savings depend on the experience of the senior negotiator. Combined, they can amount to as much as $150,000. These capital savings correlate directly with the franchisee's agent's experience.
Step 4 LETTER OF INTENT PREPARATION
Preparing a comprehensive letter of intent will prevent competition through well-drafted exclusive language, signage and protection of the resale value of the business through pre-negotiated rates and transferable option periods. It will also permit contingencies in the event...