Some franchises will require a physical location, and for many franchisees in their system, this will mean entering into a lease with the landlord or a sublease with their franchisor. The entering of a lease directly with the landlord is more common these days because it leaves the franchisors with less liability and fewer responsibilities. Therefore, it is up to the franchisee to understand the types of rent they may need to pay, and it could impact their bottom line.
When you negotiate your rental lease, it's only natural to focus on the fixed monthly total that's going to be due. However, this is just one element of your total financial obligation. There is more than one type of rent you need to be aware of as it will all factor into your location's financial picture.
The three main rent types
Rent tends to fall under three groups for retail franchisee tenants, and they pay one, two or all three types of the rents below in some form:
Minimum rent: This is the fixed amount of rent you’ll pay over the life of the lease, usually in monthly installments. It’s normally shown as a $1-per-sqaure-foot ratio.
Additional rent: This is additional rent you’ll pay to the landlord for other expenses, such as your share of the common area costs, utilities, and insurance.
Percentage rent: This type of rent, found in retail lease, is specific you and your operations. It’s based on a percentage of your sales.
It can be difficult to estimate gross sales when you are a new business, making the percentage rent tough to estimate. Since this involves reporting obligations, you may need to deal with the landlord entering your premises to inspect your records and books, and you may be subject to the costs of any financial report preparation the landlord makes for rent purposes.
In addition to rent considerations, keep in mind that your franchisor probably has the right to approve your lease before you execute it. If your lease does contain percentage rent, you will need to confirm early on in your rental negotiations with the landlord that your franchisor will allow this type of rent in the lease.
Of course, there are a lot of areas in your lease that need to be examined before you sign. However, by understanding rent basics, you'll put yourself in a better position to make an informed choice.