Understanding a lease agreement

Most franchises require franchisees to find suitable premises before they can carry on planning the unit launch. If you can't find a property that meets your criteria and is in a great location, the start-up process is effectively dead in the water.

Finding the right property is a huge part of opening a franchise unit, and a key element of it is negotiating the lease. This can be an incredibly complex process that requires many resources. For example, it's highly likely that you'll need to take advice from professional advisors in both the legal and real estate industries.

Here, we take a look at some of the critical considerations that franchisees will have to make if their franchise investment is to pay off.

Research your area

The first step in arranging the lease of any business property is extensive research. You should try to gather details about factors such as nearby transport links, level of footfall and visibility. It's also vital that you perform some analysis into the demographics of the area. How many potential customers are there in the vicinity and are they close enough to ensure your premises are their go-to location?

Typically, a franchise will assist you in finding a suitable site and conducting research relating to the surrounding population. They’ll have a good understanding of what constitutes a potential customer and whether your chosen location is well-placed. The property selection process also needs to take into consideration geographical variations in prices and local market trends.

Armed with this knowledge, you are in a better position to negotiate your contract with the landlord. For instance, perhaps your chosen location is situated outside of a city centre and would be subject to a lower level of footfall and visibility than the landlord’s price indicates. If this is the case, you have the statistics to justify a reduction in rental rates.

Partner with property agents

The vast majority of franchisees will partner with a property agent to find the ideal premises. Property agents usually have a unique insight into the local market and are well connected to sellers, businesses and other agents in the area. This informal network can prove incredibly useful in certain situations and may give you a competitive edge over other potential renters. In many cases, a well-connected property agent will hear about properties before they're placed on the market, allowing you to get in there first before anyone else has a chance.

Some franchises will have developed a strong relationship with a specific property agent and ask their franchisees to use their services. This is because the agent fully understands the franchise’s requirements and knows which properties will work and which won’t.

If your franchise doesn’t have links with one property agent in particular, try to find one that at least has some experience of dealing with the franchise model. This expertise is likely to prove useful in the long run, as they’ll have dealt with franchisees previously and will probably have insight that you won’t.

Ensure you take legal advice

Throughout the entire franchise application and start-up process, you’ll probably need to take a lot of legal advice. Considering the amount of documentation that needs to be read, understood and completed, it shouldn’t come as a surprise if you end up spending more time with your legal advisor than anyone else.

When negotiating the lease, there are many important legal factors to consider. For instance, you may find yourself wondering whether you should you sign the lease in a personal capacity or in the name of a limited company. The former might be the better option in some circumstances. However, the latter offers a cleaner, more straightforward way out of the arrangement, should you want to sell the premises or terminate the lease.

However, the answer to these types of legal questions largely depend on your specific circumstances. Your legal advisor should be able to provide you with greater insight into what your options are and what decisions you should take to protect both the new franchise unit and yourself as a private individual.

Find the right legal advisor for you

Finding an advisor who you can talk to clearly and frankly will pay off in the long run. The right advisor will be able to help you resolve any future legal issues experienced by your business, and may even save you money over time too. Also, if you choose to expand or become a franchisor yourself, your advisor is likely to offer competitive rates to ensure they are appointed the legal representative of your growing network.

However, if you find yourself working with an advisor who doesn’t seem capable of providing the support you need, don’t be afraid to jump ship and find someone who meets your requirements.

Choose between a short and long-term lease

The term of the contract varies depending on the property you’re interested in. Some offer leases of five, 10 or even 20 years. Although 20-year leases may seem like a huge commitment, they are seen by some as a great investment. By securing a property for 20 years, you’ll give your business stability. You won’t have to waste time and money searching for and obtaining another site a few years down the line. You’ll be safe in the knowledge that you will benefit from operating in that location for many years to come. What’s more, the long lease period will allow you to develop a more cooperative relationship with your landlord, so you may even be able to negotiate rent increases and extra fees.

On the other hand, shorter leases are considered by many to be a better choice. There’s no guaranteeing that the local market will stay the same as it is at the time you sign the lease agreement. In 10 years’ time, you may discover that your product or service is no longer in demand in your territory or that the principal demographic has shifted. You might even find that your premises are surrounded by vastly different outlets, which draw in a different type of customer.

In any of these cases, the best option may be to find a more suitable business location. If you’ve signed a 20-year lease, you’ll probably be faced with penalties incurred by a contractual break clause, which you’ll have to add on to your business’ existing expenses. Therefore, it is probably best to opt for a short-term lease, as this will allow you to move with the market and maximise your profits, rather than getting stuck in one location.

It is vital you take the time to consider the merits of each type of lease before you choose your final property, as your decision could make or break your business.

Termination and break clauses

It goes without saying that finding a premises with a lease that offers good value for money will help your business stay afloat in the long run. However, unfortunately, not all franchise units survive for the duration of their lease periods. Consequently, you need to protect yourself just in case things don’t go entirely to plan. As with any legal contract, it’s incredibly important that you understand and agree to the circumstances in which the contract can be broken or terminated.

An ideal property lease will have a limited number of conditions you have to meet to break off the contract. However, the owner of the property will want to protect themselves against losing their tenant. This means you have to walk a fine line between protecting your interests and meeting the owner's conditions. In most cases, a skilled legal advisor will be essential to finding this balance.

Hidden costs

Finally, franchisees need to be aware of the hidden costs associated with leasing a property. Although the actual leasehold will be your most significant expenditure, there are always going to be other costs to consider. These may include those incurred by repairs, decoration, insurance, agent’s fees, stamp duty or business rates.

With this in mind, it’s vital you draw up a comprehensive budget that factors in all these considerations. Your business won’t be able to operate and generate capital until you’ve paid the deposit, planning permission has been acquired and paid for, and the property has been fitted out. Consequently, franchisees need to account for every single potential cost relating to the property if they are to avoid any nasty surprises. This includes saving up a reasonable amount of capital as security, just in case you’re hit with unexpected costs.

Summary

As you can see, there are many important factors to consider when leasing a business property for your franchise. While this list doesn’t encompass every aspect of the process, it provides the basic building blocks from which you can begin to form a comprehensive plan for your property acquisition.

As with all complex business processes, it’s necessary to seek advice from a wide range of specialists and professionals. Therefore, one of the most important steps you can take is finding advisors who you trust to make a decision that’s in your best interest.