A Good Franchise in a Poor Location will become a Poor Business!
One of the most effective strategies to conducting site selection is not by looking for the proverbial needle in a haystack, but instead, by using the process of elimination.
The number one reason for a franchisee's failure or poor performance is due to a poor location. A poor location ultimately results from poor site selection. How else can you explain that identical stores from the same chain or franchise system will vary as much as 200% in sales volumes? Of course you will need to factor in store size, marketing budgets, management and so on; however, these are all secondary to the importance of location, in my opinion.
Essentially, there are three types of franchise businesses: profitable, break-even and go-broke. A truly profitable franchise location will make money and the business will appreciate in value. A break-even franchise location will pay the owner a small salary and pay the rent but not much more. The go-broke location that comes to my mind lasted less than three months from opening to closing for one unfortunate tenant. Despite my warnings that this was a go-broke location, the business owners poured in $80,000 into their store setup and couldn't pay their rent by the second month of operation. Usually, a go-broke location will not only steal your capital but also put you into personal bankruptcy - after you have maxxed out your credit.
If you thought that franchise site selection was all about location - location - location, you're right ... intellectually. However, when first-time tenants with limited leasing experience are involved in the site selection process, good old common sense often goes out the window. Consider for a moment that site selection involves both science (with part research and part timing) and good intuition (part luck). Franchise tenants, typically, will mistakenly rely on either a landlord's real estate agent or their franchisor (without a dedicated in-house real estate team) to lead them through the process.
In my book, Negotiate Your Franchise Commercial Lease or Renewal, I have dedicated an entire chapter to site selection. Here are just a few relevant tips from the expert:
1) Allow enough time so that you're not making decisions under pressure. Typically, for a new franchise business, you should start the site selection process six months or more in advance of when you want to open. If you find a prime location, usually the landlord will hold it for you for a few months. However, if the process takes longer, you may need several months to finalize the Offer to Lease, review the formal lease documents and/or build out the store.
2) Don't let a realtor show you space all over town. Franchise tenants often fail to realize that realtors/agents/brokers typically work for landlords who pay them a commission on lease deals signed and closed. When one agent shows you another agent's listings, this will effectively create commission-splitting between the property's listing agent and the leasing agent. This will also undermine your negotiating power since the landlord's real estate agent will know how you feel about every location. A realtor may be very helpful in pointing out a location you were unaware of, but remember who they are working for. While their advice may be sincere, it may be sincerely wrong.
3) Make your leasing inquiry by calling the "For Lease" number on the property sign. This way, you will meet and negotiate with the listing agent directly. Tour prospective sites in order from worst to best based on curb appeal. This way, you will become more confident, ask better questions and be more in control of the leasing process.
4) Don't telegraph your intentions by giving buying signals. Ask the leasing representative to e-mail you preliminary information before you agree to view the space. When viewing, stifle the urge to think out loud; subtle comments to a partner/spouse and overheard by the leasing representative can work against you. If you're asked how much you have budgeted for rental payments, remain vague. Not every question asked deserves an answer - not yet, anyway.
If you find yourself weighing a better location at a higher rent versus a lesser location at a lower rent, my advice is to go for the first option. When consulting to franchise tenants and doing site selection, my job isn't to find the cheapest location, it is to select a site that will help the franchise tenant maximize his/her sales.
Also remember that landlords sometimes prefer to lease their worst space(s) first and save the best space(s) for last. Usually, the individual unit or location you lease within a shopping centre or strip mall is more important that the mall itself - or at least equally important. Know that lease rates within a building can vary by 200% depending on unit desirability, walk or drive-by traffic flow, space shape, quality of neighbouring tenants, anchor tenants and your operating status as an independent or a national chain name. While you don't always get what you pay for in leasing commercial space, you normally don't get more than you pay for either.
Note that if you already own a franchise business but are considering relocating when your current lease expires, start your site selection at least nine months ahead. If you cannot get a satisfactory lease renewal, you will need this time to select alternative sites and negotiate a new lease elsewhere.
Franchise tenants need to know there is a great deal more involved with the site selection process than just what is explained here ... these pointers are just a few tips of the iceberg.
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