Protecting working capital through an improved real estate strategy: the benefits of a franchisor partnering with an approved strategic real estate company are far greater than the risk and harm of referring a new franchisee to a third party national real estate firm or a local commercial agent.

Author:Simcik, Scott
Position:REAL ESTATE
 
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For decades, the vast majority of franchisees, if asked, have said, "I invested substantially more money than I thought I would to open my franchise business. The working capital that I budgeted for my first year in business was used for excess rent, landlord capital improvements, tenant build-out costs, and construction overages."

Franchisees, however, don't have to be over budget. Opening a business within budget commences at the real estate pre-opening stage of a franchised business. Starting with a well-negotiated lease, a franchisee will not only substantially reduce start-up costs and protect working capital, but the franchisee will also have the opportunity to maximize profitability.

To obtain the ideal lease, franchisors and franchisees alike, must work together to understand the two main root causes that promote the most commonly used yet ineffective real estate approaches.

ROOT CAUSE NO. 1: LEGAL

A franchisor must not engage in conducting site search, lease negotiation or legal contract review services at its corporate offices. Franchise attorneys will advise franchisors to remain at arm's length from the franchisee real estate process. These activities cross the line of conducting real estate brokerage services without proper licensing. It also implies, by action, that a franchisor is controlling the final site selection decision on behalf of the franchisee, which conflicts with the contractual terms stated within the franchise agreement. Well intended, this can be perceived as over-reaching to estimate and project the revenue of a potential location.

ROOT CAUSE NO. 2: OPERATIONAL

Not knowing where your next franchise location will be placed forces a franchisor to default to real estate methods that do not yield the highest quality results. Franchisors struggle to predetermine geographically their next 10 franchise locations. It is too difficult to predict, in advance, from which city or state franchisors will receive a new franchisee inquiry and ultimately grant a franchise. In the exception, large established franchisors can predetermine where their next franchise location will be assigned.

These two root causes force emerging franchisors to rely upon the two most commonly utilized but ineffective commercial real estate approaches:

INEFFECTIVE REAL ESTATE APPROACH NO. 1:

The franchisor introduces a franchisee to a national commercial real estate brokerage firm.

* Conflict of Interest. A potential conflict...

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