I am a bit wary of the franchise model. There, that’s the most polite way I can state it. It’s an opinion cultivated from working with so many struggling single unit franchise owners and a ton of research into the subject.
Lots of people do just fine owning franchises (generally multi-unit operators) but as we know, they’re not all winners. And in this game, even the winners sometimes lose. Understanding that a good chunk of franchisees don’t make a lot of money changes how you look at the entire model.
As franchise organization grow in numbers and popularity – some with much lower start up costs than the more established organizations, they are becoming attractive options for the entrepreneur wannabe and certainly a boon to shopping center leasing.
But in most cases, the franchisor has too little skin in the game and the local operator takes on most of the risk. Which means as a shopping center owner, that risk is yours as well.
Here are a few suggestions to help you dig a little deeper when leasing to franchise prospects to help avoid failure on their side – and yours.
Beware of the three “News”
If you have a prospect with a franchise that’s
NEW to market,
In a NEW shopping center
With a NEW operator
STOP.
This is the perfect storm of potential problems. New centers need time to build traffic. New operators need time to learn how to run a business. And new-to-market businesses need ramp up time and create brand awareness.
If it’s only the first or second unit in a market, query the franchisor to see if they’re planning substantial marketing support or if the franchisee has a solid budget to get the market primed.
Check the business plan carefully for contingency budgets and realistic first year revenue expectations. Franchisees are generally sold on best-case results and may be overly optimistic in their projections. Creating a more realistic and achievable forecast will help the new owner through a more modest growth period.
Interviewing the franchisee
Why did they chose to go into business and why did they choose this particular franchise?
If the prospect cites the “done for you” aspect of franchisor support, or they purchased the franchise to fund their retirement in 5 or 10 years and plan to be absentee owners, note the potential for issues. Franchises provide a roadmap, yes, but they don’t take you by the hand through every business challenge. Some things you have to figure out for yourself, like how to hire and retain minimum wage employees, and create your own locally nuanced marketing plan. It’s still a lot of work and nothing that should be left to inexperienced managers during its growth years.
Do they have any expertise in the area?
Are they buying a salon franchise but never worked in the industry? A fast food operation but never set foot in a commercial kitchen? Again, franchisors make it seem easy but the reality of learning a brand new industry is much more daunting.
How much they anticipate earning as a franchise owner?
At minimum, examine the business plan for owner salary expectations. How much? How soon?
Interviewing the franchisor
This is where I’d spend the majority of my efforts before leasing. The franchisor may not answer them all but any information is better than none.
What is the average of rent as a percentage of rent for entire system?
This will give you a good indication of general performance for the system. If the average rent as a percentage of sales is high across the system, that means the revenue expectations aren’t being met. Maybe a smaller space would be a better fit?
What are the average first year revenues for the franchised units?
A simple question that will tell you if the franchisee’s sales projections are in line.
What is the median annual revenue for all units?
Another great way to assess whether the franchisee’s short and long term projections are reasonable.
Average age and failure rate of all franchise units
If you look at the ranking of franchisors widely available on the internet, you’ll often see the total number of units. Some reports also cite closures each year. This is an excellent resource for determining failure rate if the franchisor won’t tell you.
Information on other franchises in similar markets
Does the franchisor have another market with a similar number of units and tenure? How are they doing? What was the ramp up time? What type of marketing support they are supplying?
Franchising is here to stay and as more companies adopt this model for scaling, you’ll see more less-than-stellar offerings. Rent costs, minimum wage requirements and the overall profitability of the model comes into question. So when someone comes to you with big dreams of business riches via a franchise, take a practical look at the big picture that goes far beyond the prospect's good credit and bank account. Take the time to really dig into the potential and the risk, then structure your deal so that everybody wins.
For more information about Tenant Mentorship and how we can assist with turning your small shop tenants into high performance machines, email programs@tenantmentorship.com