By Dale Willerton
The number one reason for franchise failure or the poor performance of a business is due to a poor location. A poor location ultimately results from poor site selection. How else can one explain that identical stores from the same chain or even similar stores within the same industry will vary as much as 200 percent in sales volumes? Of course store size marketing budgets management and so on must be factors to consider; however, these are all secondary to the importance of location. While speaking at the International Franchise Association’s Multi-Unit Franchise Conference in Las Vegas last year, I explained that there are essentially three types of franchise businesses: profitable, break-even and go-broke. A truly profitable location will make money and the business will appreciate in value. A break-even franchise location will pay the owner a small salary and pay the rent, but not much more. For example, a go-broke location lasted less than three months from opening to closing for one unfortunate tenant. Despite my warnings that this was a go-broke location, the business owners poured in $80,000 into their store setup and couldn’t pay their rent by the second month of operation. Usually, a go-broke location will not only steal capital, but also put one into personal bankruptcy after maxing out credit cards, second mortgaging a home, tapping out a line of credit and, of course, borrowing from relatives.
Most people think site selection was all about location, location, location; they’re right, intellectually. However, when first-time franchise tenants with limited leasing experience are involved in the site-selection process, common sense often goes out the window. Consider for a moment that site selection is not a science; it’s an art, part research, part luck, part timing and many other ingredients combined. For example, is the best time to conduct site selection before or after one commits to opening a franchise? If it sounds obvious, don’t be fooled.
In my book, Negotiate Your Franchise Lease or Renewal, an entire chapter is dedicated to site selection. Here are just a few relevant site selection tips:
Allow enough time to avoid making decisions under pressure. Typically, for a new business, one should start the site selection process six months or more in advance of the desired opening date. If a prime location is found, usually the landlord will hold it for a few months. However, if the process takes longer, one may need several months to finalize the offer to lease, review the formal lease documents, design and or build out the store.
Don’t let a realtor show you space all over town. Tenants often fail to realize that realtors, agents and brokers typically work for landlords who pay them a commission on lease deals signed and closed. When one agent shows another agent’s listings, this will create commission-splitting between the property’s listing agent (whose name is on the sign outside the building) and the outside leasing agent (who will bring the client to the property). Bringing in an outside agent will, effectively, rob the listing agent of receiving a complete commission. A realtor may be very helpful in pointing out a location a client was unaware of, but remember who they are working for.
Make a leasing inquiry by calling the “For Lease” number on the property or the leasing agent’s sign after finishing the drive around doing site selection. This way, the client will meet and negotiate with the listing agent directly. Begin by touring prospective sites in order from worst to best based on curb appeal. This way, the client will become better at handling and fielding questions; by the time the client gets to the property he likes the most, he will be asking better questions and be more in control of the leasing process.
Don’t telegraph your intentions by giving buying signals. Ask the leasing representative to e-mail some preliminary information before agreeing to view the space. When viewing, stifle the urge to think out loud; subtle comments to a partner or spouse and overheard by the leasing representative can work against the interested party. If asked how much has been budgeted for rental payments, remain vague.
Never make the first offer to lease. The landlord’s leasing representative, upon request, will prepare a lease proposal or an offer to lease containing suggested terms and conditions for your tenancy. While this is not a site selection tip per se, it is an integral part of the site-selection process. If the client receives the offer to lease first, he will then be in position to make a counter offer or negotiate the proposal.
Don’t negotiate on only one location at a time. The client can and should create competition for tenancy by getting lease proposals on several different properties simultaneously. Avoid the tendency to negotiate on only one deal at a time. Negotiating on multiple locations consecutively may be the single most effective tool for creating the best deal. If one landlord is offering three months of free rent, perhaps the next landlord will give four months of free rent. By playing one landlord’s lease proposal against another, the client will be negotiating from a position of strength.
Do your homework before you start. Get out a map and mark the boundaries of the franchise territory. Use the Internet to pinpoint locations of competitors and complimentary tenants that might enhance the business. Talk with existing tenants in buildings that have been selected as prospective sites. Also, know the franchise territory’s demographics: Are these residents the best intended customers?
If the situation becomes one of weighing a better location at a higher rent versus a lesser location at a lower rent, go for the first option. When consulting with tenants and conducting site selection, my job isn’t to find the cheapest location, it is to select a site that will help the franchise tenant maximize his or her sales. Remember, the client wants to be profitable, not break-even or go-broke. It is better to have negotiated poor lease terms on a good location than a great deal on a poor location.
Also remember that landlords sometimes prefer to lease their worst spaces first and save the best spaces for last. Usually, the individual unit or location one leases within a shopping centre or strip mall is more important than the mall itself or at least equally important. Know that lease rates within a building can vary by 200 percent depending on unit desirability, walk or drive-by traffic flow, space shape, quality of neighboring tenants, anchor tenants and the clients’ operating status as an independent or a national chain name. While a client doesn’t always get what he pays for in leasing commercial space, he normally doesn’t get more than he pays for either.
Don’t despair if there is a great building, but there are no current vacancies. By contacting the property manager or leasing representative, you may discover that another tenant’s lease is about to expire and he will be closing out or moving. Perhaps a current tenant will be leasing on a month-to-month basis, but the landlord will prefer a permanent tenant? Don’t rule out the hot properties just because there are no vacancies. Every building has tenant turnover sooner or later. Frequently when my client has wanted to open in a less desirable location, simply because nothing else was available, I encourage him to wait. We stay in contact with the landlords and, invariably, a better location usually becomes available within a few months. Considering that a client will be leasing that location for a very long time, it is worth the wait.
For some franchise systems, location is absolutely critical while for others it may be less important. If a business is not location dependent, then one should have the proverbial upper hand in negotiations. This point applies more so to office or non-retail franchises.
There is a great deal more involved with the site-selection process than just what is explained here and these pointers are just a few tips of the iceberg.
Dale Willerton is president of The Lease Coach and a senior commercial lease consultant and author of ‘Negotiate Your Franchise Lease or Renewal.” He can be reached at 800-738-9202 or DaleWillerton@TheLeaseCoach.com