Franchising

Many landlords tend to view a franchise as either a chain store tenant or an independent operator - a perception that can cause problems in franchise lease negotiations. To understand the key issues, start by examining the concept of franchising. The International Franchise Association reports 35% of all retail sales are from franchised businesses. What is it about this business strategy that has made it so successful?

1. Marketing clout to penetrate and dominate markets
2. Brand-driven consumer purchases
3. Consumer loyalty to the brand
4. Consistently applied operating system that addresses consumer needs
5. Ongoing support that improves the effectiveness, efficiency and profitability of each unit and the overall system
6. Franchisee motivation.

In short, the reasons franchises are successful are much the same as the reasons chain stores are successful; franchises look and perform like chain stores. But a key difference lies in reason number six above; the franchisee motivation.

TENANT MOTIVATION

The franchisee has a much greater motivation to succeed than does even the best store manager. A franchisee has made a significant financial investment in the assets of his or her business. He or she has made a conscious choice to be self-employed and sees being part of a franchise system as a way to achieve life goals. That franchisee will do everything possible to ensure the business succeeds; and the franchisee-franchisor relationship differs dramatically from the chain store's employee-employer relationship.

Franchising is a mutually beneficial business relationship based on a legal structure. Franchisors must comply with federal and state regulations, which in most cases make it impractical to negotiate the terms of their franchise agreements. The better a landlord understands a franchise tenant, the easier it will be to negotiate a lease.

FRANCHISEE ON THE LEASE

Landlords often want the franchisor to sign the lease for the franchisee, but most franchisors are not in the property management business. They do not have trained staff to handle these matters. Franchisors prefer to be sent duplicate default notices so that they can help cure the default. If the default causes a termination, the franchisor would like the option to come in and operate the business until it can find another franchisee. This agreement keeps a store from going dark and maintains rental income.

ASSIGNMENT or SUBLETTING

A franchisee does not own his or her business. A franchisee is granted a license to operate a business and only owns the assets of the store, while the franchisor owns the trademark and the operating system. If a franchisee wants to sell the franchise rights, he or she must get approval from the franchisor to transfer those rights before selling the assets. To customers, the business appears to be the same. Understandably, landlords do not want a tenant to develop a short-term business and sell it. But a franchise ensures the landlord that the business is operated uniformly and consistently with all other stores in the franchisor's system, even under a new franchisee.

LEASE TERM

Most retail franchises have 10-year terms. Franchisees cannot renegotiate the term of their franchise agreement; the agreement is typically nonnegotiable and uniform throughout the franchise system. Franchisees frequently get financing through their bank, which offers 10-year loans in harmony with the franchise agreement. Franchisees need to have a lease that is compatible with their franchise agreement and business loan. This is where the landlord needs understanding of the full situation.

ADVERTISING REQUIREMENTS

Landlords of shopping centres typically require tenants to spend some percentage of gross sales on advertising. Franchisors also require their franchisees to advertise. Landlords need to acknowledge this and allow the dollars spent with the franchisor to apply to the lease-required advertising. Often, franchisees can purchase expensive advertising (TV, radio, newspaper) through their franchise advertising fund and make a greater impact in their local market.

TRADEMARK/STORE DESIGN

Franchisors have registered trademarks and distinctive store designs. That is part of their brand image; conformity and standardisation contributes to the franchise's success. Franchisees are required to build their store according to the franchisor's specifications without changes. Landlords must respect that identity and not alter the look so that it becomes unrecognisable to the customer.

MULTIPLE LOCATIONS

Landlords who own multiple shopping centres often negotiate multiple occupancy sites with a tenant. Some landlords tie a deal for a choice location to a lesser site. A chain retailer can choose to agree to such a deal because all of its stores contribute to the corporate profits and the impact of one store can be mitigated by the performance of others. When a franchisor is negotiating for several franchisees, the franchisor cannot agree to a below-average location because each franchise store stands on its own. Each franchise is a single investment and must be able to cover its own expenses and generate enough profit to justify the initial investment.

USE CLAUSES

These special clauses need to strike a balance between the landlord's need to protect the centre's merchandise mix and the franchisee's requirement to provide all the goods and services that other franchisees offer. Franchisors spend a lot of time and money developing new products to enable franchisees to keep up with customer demands and increase profitability. If a franchisee is prevented from offering additional goods and services, the store will seem out of date and limited by comparison to the other franchises in the system. The use clause needs to be flexible enough to allow for changes in the operations of the franchise within reasonable limits, or both the franchisee and the landlord will suffer.

BENEFITS OF FRANCHISES

Franchises combine the best attributes of a chain store and an independent operator. They offer a brand name, a proven operating system, corporate support, advertising programs, consistency and standardisation much like chain stores. In addition, franchisees offer the same motivation and responsiveness to customers' needs and demands that independents do. As a landlord you can have the best of both worlds. Remember, a new franchise opens every 16 minutes. If you don't get that franchise tenant in your centre, someone else will.