Looking to franchise? Here’s why you’ll need a good lease

A well-negotiated lease agreement can ensure long-term growth and profitability.

Franchising is more than just slapping the logo of a famous brand on your products hoping they’ll fly off the shelves – like any other business, it requires hard work and proximity to your customers.

Never underestimate the impact of a good lease agreement when searching for premises to house your franchise, because those T’s and C’s can either make or break your business.

“A well-negotiated lease can be the bedrock of your franchise’s long-term growth and profitability,” said FNB Franchise Development Manager for Restaurants and QRS, Henk Botha

He explained that identifying the most appropriate property and negotiating favourable lease terms was important in the early stages of setting up a franchise.

“It’s definitely worth your while to approach it with due care and attention, and preferably with the support and guidance of your franchisor and the experts at your financial institution,” Botha advised.

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Simply a blue-print

Although franchising has its advantages, like instant recognisability from the onset, Botha said it is not a guarantee of long-term success.

“A franchise may come with a blueprint that you can follow for success, but it’s the hands-on, strategic decisions early on that often separate thriving and successful businesses from the rest.”

“Franchisees cannot rely on the franchisor to make their businesses a success, they need to take a hands-on approach throughout the lifetime of the franchise store, but especially in the early stages of establishing the operation – which is the point at which mistakes can be the costliest.”

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Franchise formalities

When negotiating a lease agreement, Botha advised drawing from the franchisor’s disclosure document as a starting point.

“This document is a franchisee’s compass, detailing the financial performance of existing outlets and setting clear expectations for new ventures.

“Any franchisor worth their salt will have hard numbers available to franchisees on what portion of turnover should feasibly go towards rent,” Botha said, further explaining that such details were key to informing the franchisee’s property rental decisions.

Using the dining industry as an example, Botha said that franchisees looking to start sit-down restaurants should aim for between six and 10% of turnover as a maximum rental for their properties.

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Rent structure matters

When it comes to a business’s early viability, the type of rent structure matters. Both highlighted the important difference between fixed rent base and turnover-based rent.

“With a fixed rent, the initial rental period might be financially strenuous, but as turnover increases, it becomes more manageable.

“Conversely, turnover-based rent is less burdensome at the start, but could eat into profits as the business grows.”

Botha advised franchisees to negotiate for a “hybrid” rental model, starting with a low fixed rent, and then shifting to turnover-based rent once predetermined milestones are achieved.

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Don’t shut out the franchisor

It’s important to work closely with your franchisor during lease negotiations, after all your roof will bear their brand.

“It’s the franchisee’s responsibility to identify and negotiate the property lease, but doing so without the franchisor’s insights is a missed opportunity,

“And involving an experienced franchisor in your lease negotiations is not only a requirement of some franchise agreements, it’s also a way of avoiding potentially expensive pitfalls that could have a massive knock-on impact on your business in the longer term. ” Botha said.

He further explained that a partnership approach in all aspects of the franchise business could provide franchisees with a vital edge, and aligning their lease terms and business practices with proven models.

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Transformation project

Once you’ve secured your business premises, the transformation project awaits. While the landlord provides the space, the franchisee must give it a dramatic facelift to meet the franchisor’s standards.

Botha advised entrepreneurs to pay close attention to the intricacies of setting a franchise store.

“Negotiating with landlords to contribute to the fit-out of a space can significantly offset initial costs.

“However, it’s vital to ensure these contributions are genuine investments into your business’s future, not just deferred expenses that will later be recouped at a high cost,” Botha warned.

He further advised seeking financial advice to secure the best funding deal for space alterations and upgrades, so that these costs won’t compromise future profitability.

“It’s the franchisee’s responsibility to identify and negotiate the property lease, but doing so without the franchisor’s insights is a missed opportunity,”

“And involving an experienced franchisor in your lease negotiations is not only a requirement of some franchise agreements, it’s also a way of avoiding potentially expensive pitfalls that could have a massive knock-on impact on your business in the longer term.”

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