How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
As we emphasize in our new book, Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013), the business terms of a commercial lease agreement, combined with the location, represent the platform that your franchised business is built upon. Your franchisor may be able to change its products, services, pricing and timeline, once you’ve signed a long-term lease commitment, you’ve got to make that location work. It’s do or die time. And the more money you spend building out your location, fixturing it and stocking it with merchandise or inventory, the more capital you have invested in the success of that business.
If you have never negotiated a commercial lease before, chances are you won’t find this process easy or enjoyable. There is a steep learning curve when it comes to presenting lease terms and negotiating an offer to lease or letter of intent. Even if you have experience with hard negotiating, chances are you’re not looking forward to locking horns with the landlord or their real estate agent – opponents who have experience on their side.
The rental rate is one of the most focused-on business terms, perhaps rightly so because it is one of the biggest factors determining the success or failure of your franchise business. The Lease Coach looks at how the landlord determines the rental rates, how to determine what you can afford to pay and how to negotiate the best rental rate. The rental rate goes beyond one simple number – it can include additional rent often known as Operating Costs (Common Area Maintenance/CAM Costs) and perhaps percentage rent, which can dramatically increase the total payment you make each month.
We also explore choosing the right commencement date – how to best position yourself to take possession of the premises once the lease agreement has been signed by both parties. Traditionally, a franchise tenant would spend one to three months building out their space prior to opening to the public. A lot can go wrong during that time. Franchise tenants must know how to hold the landlord accountable and how to ensure and protect their rights in advance when the unexpected occurs.
In the leasing process, deposits are often a misunderstood component. Many franchise tenants are misled into believing that deposits are mandatory and pushed to provide larger deposits than may really be required or justified.
Finalizing the formal lease agreement is a negotiation unto itself. Yes, the business terms have been agreed to, but now a 30-50 page formal lease document is looming and requires consideration. Understanding and negotiating the formal lease agreement should be done with the help of a professional – ideally, a lease consultant. Many clauses in the formal lease agreement require negotiation, amendments or deletion. Adding certain phrases or clauses to the lease agreement also helps to protect the franchise tenant. Smart business owners realize that with any contract, it’s better to be safe than sorry.
Dealing with the landlord and their representative, whether it’s the property manager or a commercial real estate agent, is definitely a challenge. There are many types of landlords with different motivations for owning property. Some landlords are billion-dollar corporations while other landlords are small and accessible to the franchise tenant. Understanding your opponent before you get in the ring makes a big difference in the outcome of your lease negotiation.
As a final note, we always like to stress how the leasing process can take differing amounts of time, depending on whether you’re opening your first franchised location or your fifth. You can discover a great deal during your first few lease deals that you can carry forward, potentially saving you both time and money. The key is to give yourself ample time (nine – 12 months – at a minimum) so that you can recover from setbacks and delays without it costing you more capital or rent. Many franchise tenants tell us how pressured they feel by real estate agents who keep pushing them to make a deal or sign a letter of intent. Many have regretted caving in to that pressure and making hasty decisions. We have heard from franchise tenants who have got calls from agents saying that someone else is looking at the space that they were just looking at last week, so they had better hurry and sign an offer to lease. Don’t let this sway you. Pace yourself. Go at your own speed and get it right.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to DaleWillerton@TheLeaseCoach.com
