Finding a good location to conduct business is a task that all potential franchisees must consider. This is true whether buying an existing franchise up for re-sale, commonly called a transfer, or buying and constructing a brand new franchise building. There are a few minor differences of locale between the two choices, so for clarity we will evaluate the considerations of location that apply to all prospective franchise buyers first, followed by a few points special to those opting for a resale.
To begin, let’s get right in and deal with the one area that causes buyers’ eyes to get a little crossed: the lease agreement. There is no need to worry. The key is information and that information is gained by asking the right questions to the right people. Who are those people? The key players involved are:
Once you have an idea of who these people are, then it’s time to start asking some questions or have your attorney ask them. For instance, there are many economics of the location you should consider. What will the rent be? Are there clauses of the lease that equal large expenses, such as payments for common- area maintenance like shopping-center parking lots? Is there landlord insurance? Are the real estate taxes reasonable for that area?
Make sure your real estate broker has your interests in mind. The broker should provide you with information on what historical and economical prices and expectations are considered reasonable BEFORE signing any lease agreement. Your attorney should also be proactive in trying to obtain rent reductions in the lease agreement for any tenant improvements made to the property, if any allowances are available. There might also be similar considerations that the franchisor includes as part of the lease agreement. Check to make sure all expectations are spelled out clearly and are reasonable before signing. Commonly, the franchisor will provide support materials, such as “use” clauses, or other language that needs to be included in the lease. In some instances, the franchisor will provide lease contracts for you to propose to the landlord. Regardless of how the lease is proposed or by whom it is prepared, do not sign it on impulse or sign it without having it reviewed by an experienced lease attorney.
As a prospective buyer, you must also perform due diligence outside of what’s included in the lease agreement, especially regarding location-specific factors. But you’re not the first person prospecting to purchase a franchise. Many people are already within the same franchise brand that you’re considering. Ask them questions. Find out which locations do the best business without disclosing which one you’re considering. Get their advice and see if their inside knowledge surpasses what the franchisor volunteers. Conducting research like this will enable you to get unbiased information and make an educated decision as to your potential location.
Human input is important, but with technology you’re not nearly as limited as entrepreneurs of the past. Tools are available. There are sophisticated programs, such as location analyses, that make evaluations of different locations very informative. Ask the franchisor’s personnel about these programs and whether or not they know where to access them. These tools can help you learn the demographics about local consumers, their ages, their spending habits, traffic patterns, and even data about competitors within a geographical range of your location.
Another aspect that applies to new construction of a franchise, but not to a re-sale, is zoning. Make sure to check with your city or county zoning authority before you commit to building. And even when purchasing a pre-existing franchise building, zoning might be something to question in case you wish to upgrade or expand the building or parking areas in the future. This would be important, for example, if the area were to expect a new incorporation of public transportation, increasing your customer foot traffic, or if the county were to expand a highway, increasing vehicle demands. Check with zoning and also with your local chamber of commerce.
Competition is another important factor of location. Some franchisors do not provide exclusive territorial rights, meaning that some franchisees find themselves directly down the street from the same-brand franchise facing revenue-depleting cannibalization. Not good! Make sure the franchisor provides a comfortable territorial zone of exclusivity for your franchise before signing any agreement. Most will agree to provide territorial rights.
However, contrary to popular belief, competition from other franchisors is a good thing. Have you ever noticed that burger joints commonly locate close to big competitors? Sometimes it’s caused by zoning, but more frequently the franchisors do this to increase sales. Research has shown that when franchisors build close to large competitors they do more business because those competitors have already spent advertising dollars to bring consumers to that store, and therefore to that area. Additionally, those competitors chose their locations based on demographics, an advantage the new franchisee can use with less R & D expense than would otherwise be required.
Other topics of location should be of concern to franchisees. Does the area have seasonal employee pools, or are they consistently available? Is the area dependent on seasonal business or tourism? Will insurance be high because of a high crime area? If competitors are located nearby, are you confident that your business model can effectively compete against them for a profit? Can suppliers easily access your business to make deliveries? Is lighting and parking convenient for customers if you conduct business at night? How far away do the customers (with the necessary demographic profiles) reside in ratio to you and your competitors’ locations?
These are considerations that all prospective buyers of a franchise need to know. But there are also a few that the buyer of a pre-existing franchise needs to consider. For example, is the current franchise agreement transferrable on a re-sale? Are there any hidden fees attached to the transfer? What prior requirements were attached by the landlord? If any, how costly will they be?
Especially important, ask the franchisor if any upgrades will be required. Sometimes the franchisor requires upgrades to signs, colors, or other building design changes that can become particularly expensive. Occasionally, a franchisee has failed to perform these upgrades and can be required to foot the bill before selling or they can be part of final negotiations of purchase price between the buyer and the seller.
Consequently, a prospective buyer of a franchise resale must not only ask the ordinary questions of location, but also the case specific questions related to a transfer of ownership. As long as the motto of “location, location, location” is coupled with “question, question, question,” followed by good answers, buying a piece of the franchise pie should be sweet with profitable rewards.