Buying Bricks and Mortar - Know This!
By Lori Karpman

At one time franchising was synonymous with bricks and mortar retail concepts. Today, this is no longer true as several other models exist within the field that have no such borders. However, the traditional retail model still represents the majority of the franchises sold today. While there are many issues particular to this model, I have chosen two important ones to focus on for today.

The major distinction between this model and its colleagues revolve around the leasing process as other models lack this element altogether. The principal issue is who signs the head lease, a query long debated in the industry. The franchisor’s main interest is to control over the premises in the event of default or termination. He needs, for goodwill reasons, to be able to enter the premises and operate the business, or in the alternative, de-identify the unit. A store closure reflects poorly on the system as a whole. The landlord’s interest is in having a strong franchise operator so that there is no such situation arises. However, in such, the landlord wants a strong covenant or guarantee from someone, that he will not suffer financial loss. Empty space makes his property look less appealing to future tenants and hence, devalues his property. Given that the franchisee is generally an inexperienced business operator; the landlord seeks his covenant from the franchisor. If the franchisee has a strong business background the landlord may be so inclined to accept a covenant from him. Generally, the franchisor becomes the head tenant and sublets the premises to the franchisee on the same terms and conditions as the head lease. There should be no additional charges by the franchisor to the franchisee for sublease administration or the like. The franchisee pays rent, and otherwise deals, directly with the landlord as if these two parties had signed the lease between them. If the franchisee signs the lease directly, the franchisor intervenes as a party to obtain a right of first refusal to the premises in case of default. To exercise that right, the franchisor must remedy the defaults of the franchisee.

Another issue of concern is the timing between the signature of the franchise agreement, the location of a suitable site and the signature the lease. Most franchise agreements provide that once paid, the franchise fee it is completely non-refundable. That’s fine if a location has already been selected pre-hand, a lease, or serious offer to lease is in the works or all signed up or, or are buying an existing unit. But, what if you don’t? The agreement must provide for a delay in which time a suitable location must be found and, after which, the initial franchise fee, (less any training fees or reasonable major expenses incurred by the franchisor on your behalf), will be refunded to you. I had a situation where, after one year, we were still unable to find a suitable location for a franchisee in his area. He had paid his 25,000 franchise fee, but after such a long period with no success we refunded a large portion of it despite the fact that our agreement had no such proviso. As well, make sure that if you are buying a location to be developed that the location actually exists! True story: a client of mine was sold a location at the corner of X & Y which he chose off a list provided by the franchisor as available sites. He soon after discovered that there was no site available at that corner and he had already sent off his cheque for the franchise fee. He immediately stopped payment. The franchisor’s response was that when a site became did become available it would be his! Needless to say there was no provision of any time delay or for the refunding of the fee. He had been sold air!

Those are but two of the things to be on the lookout for when buying a retail franchise. The addition of third parties like the landlord, and a host of other characters like designers and contractors make the start up phase a complex and interesting one. Good franchisors will work closely along side you and most provide complete turn-key solutions that make the process quite simple actually. Success in retailing, franchised or not, is based on three key principles: location, location, and location. So, if you take away one piece of advice it should be this; wait until the right location comes along-like all things in life-good things are worth waiting for.

Best of luck,
Lori