Franchise Executive Insight
The Executive’s Role in Real Estate Transactions
Founders, CEOs, Presidents, COOs, Franchise Sales Executives, Real Estate Directors
Volume I, No. 1 - Introduction
Table of Contents
INTERNATIONAL FRANCHISE ASSOCIATION
A Reality Check for Real Estate Services 2
Redefining the Franchisor’s Role 3
Looking Closely at Legal Strategy 4
More Involvement Doesn’t Have to Come With More Risk 5
Higher-Quality Locations With a Controlled Sales Process 6
Beware the Local Leasing Agent 7
The Right Answer: A Strategic Partner 8
Protecting Yourself While Promoting Franchisee Success 9
Building a Successful Real Estate Strategy 10
The Cost of Do-it-Yourself Site Selection 11
The Financial Impact of a Poorly Negotiated Lease 12
Finding the Hidden Profits During Legal Review 13
FGP - Your Strategic Real Estate Partner in Commercial Leasing 14
As a Franchise Executive, your ongoing success relies on the success of your franchisees.
To support and maximize that success, you provide your franchisees with the tools and access
to expertise they need to launch and grow a profitable business. That includes finding the most
strategic location for your franchisee to maximize their revenue and profitability.
Typically, franchisors have taken a passive and limited role in the real estate process, relying
instead on quick-and-easy methods of identifying and securing locations. Understandably,
new and emerging franchisors often fall into a more self-preservationist approach, often
perpetuated by inadequate consulting, operational, or legal strategies.
This approach pushes the burden of key real estate decisions — site selection, lease negotia-
tion, and legal review — onto the shoulders of inexperienced franchisees. These franchisees, in
turn, rely on outsourced, untrained, and inexperienced real estate agents and brokers identified
state by state through regional, national, and network organizations — hardly qualifying them
as experts in your Franchise Business Model. This recipe for disaster is also a reflection of a
franchisor’s missing core value: to provide high-quality and standardized real estate services
that protect a franchisee’s success.
In this report, we take a closer look at why these common practices are far from best
practices, and why it’s important for Franchise Executives to take a more proactive role in
franchisees’ real estate decisions as part of their core values.
The old real estate adage is true, particularly for franchise operations: Location really is
everything. As a Franchise Executive, your philosophy and approach to the real estate services
you provide have a significant impact on your franchisees’ performance and survival.
Real estate plays a central role in the overall success of a franchise system. How visible is the
location, how convenient is it to access, does it offer the right tenant mix, how advantageous
are the lease terms — all these factors drive a store’s volume and profitability. Your franchisees
may follow your operating system to the letter, but without the right location and lease,
revenue and profitability will not be maximized to their fullest potential.
A Reality Check for Real Estate Services
The Importance of
Making Real Estate a
Core Value of Your
If CEOs visited and audited each location in their
system, they would discover that there is up to a
30% error factor in visibility, convenience,
tenant mix, economics, and lease terms. This is
the single largest contributor to a franchisor’s
annual turnover rate.
Franchise Executive Insight
Utilizing a multitude of different outsourced
real estate agents, brokers, and firms denies
your franchisees a consistent level of quality
and expertise that is required to identify and
negotiate high-performing locations.
So what should a Franchise Executive be offering franchisees in the way of real estate
services? Best practices tell us that franchisors should be providing each franchisee with a
standardized all-in-one site selection, lease negotiation, and legal review service on par
with the services provided for a corporate store. In other words, treat your franchisees to the
same level of expertise and scrutiny you would a corporate store you’re preparing to open.
Currently, that’s not the way things are done. A huge gap exists between the way real estate
services are provided for franchisees vs. corporate stores. The reason for this gap goes back to the
aforementioned self-preservationist approach adopted by most franchisors — an approach which
is only reinforced by the Franchise Disclosure Documents (FDD) and Franchise Agreements.
Among these documents you’ll find site selection and final location waivers designed to legally
release franchisors of any responsibility in the event poor site selection and unfavorable lease
terms contribute to the franchisee’s failure. But how can a Franchise Executive, in good faith,
ask a franchisee to assume all the responsibility for poor real estate choices while at the same
time offering substandard real estate services provided by untrained and outsourced leasing
agents state by state with little vested in the success of the franchise operation? It doesn’t
seem quite fair. Nor does it sound like good business practices.
To maximize the revenue potential of each franchisee location, the Franchise Executive must
develop a standardized approach to the real estate process, from site selection to lease
negotiation and legal review. This standardization ensures that each franchisee has been
offered an equal opportunity to succeed.
Redefining the Franchisor’s Role
The Key to Securing the
Locations for Franchisees
To identify the root of this hands-off real estate approach motivated by self-preservation, we
must take a closer look at the current legal strategy in play. Franchise agreements are
consistently drafted so that franchisees have the right to select and choose their final choice
of location. These agreements also provide the franchisor the right to approve or disapprove
of the location based on any criteria with the purpose of protecting the franchisee or other
franchisees within the system.
Look even further into the document and you’ll find other strategies meant to release the
franchisor from responsibility. These include requiring the franchisee to agree to hold the
franchisor harmless in the event a poor location contributes to the closure of the business.
The majority of FDDs and franchise agreements also refrain from listing an “approved” real
estate service provider — not because doing so is illegal, but because it is simply not advised.
Misinterpreting this legal advice as a legal must, franchisors refrain from taking an active and
committed role in the real estate process. They take limited steps to innovate or improve their
current real estate system, or to assume more operational responsibility in providing a higher
quality of real estate services.
But keep in mind: Just because you’re not actively involved in the real estate decisions made
by your franchisee doesn’t mean you’re excused from your legal responsibilities.
Looking Closely at Legal Strategy
Don’t Let Legal
Language Limit Your
Real Estate Services
Yes, your consultant or attorney may advise you not to list an approved real estate provider
within your FDD. Chances are, you’ve been told that crossing this legal line might result in a
lawsuit. But as part of your legal strategy and your real estate process, you should articulate
your responsibility as a franchisor to identify an approved and exclusive real estate provider
who is trained on your location specifications and guidelines.
You must have the freedom and flexibility to continually improve your real estate process
aimed at boosting store revenues and profitability while reducing franchisee failures. By under-
standing the difference between legal mandates and legal strategies within your FDD, you’ll
feel more confident about becoming actively involved in your franchisees’ real estate decision.
The unavoidable fact is, all parties involved in a franchise agreement are exposed to vicarious
liability. Regardless of how well your attorney drafts the agreement, a franchisee can still initiate
a meritless lawsuit. But keep this in mind: Franchise lawsuits are rarely triggered by the written
legality of a contract, but rather the mismanagement of the franchisor-franchisee relationship.
Bottom line: Don’t let your fears of a potential lawsuit prevent you from requiring the use of an
approved real estate service provider as part of your franchise agreement. And by all means,
don’t let it prevent you from supporting the success of your franchisees.
While you’re perusing your FDD, ask yourself this: Is it more advisable to let an inexperienced
franchisee select his or her own location? Or would it be smarter for the franchisor to require
the use of an approved real estate service provider trained to find the most strategic location
for that franchisee? Before you answer, remember that you will have the right to contractually
approve the location once it’s selected.
We think the answer is clear. The more experienced the real estate professional, the more
informed your franchisee, the better the chance of that franchise store succeeding in that location.
More Involvement Doesn’t Have to Come With More Risk
The right process with the wrong agent and
the wrong agent with the right process will
both yield negative results. Your real estate
agent or broker should understand your
business model as well as the CEO.
Franchise Executive Insight
Chances are, you’ve heard it before. When it comes time to discuss site location, a new
franchisee candidate tells you, “I have a friend/family member in real estate.” Or perhaps,
“I have a real estate background.”
This comment reflects a desire common among new franchisees to be in control of the real
estate process, even while possessing limited experience with your franchise system’s
customer, concept, demographics, or economics. As a franchisor, you have the responsibility
to speak up and request that your franchisees follow the real estate process you have carefully
developed and put in place. Thus limiting the franchisee’s exposure to unknown risks when
opening their first location.
It’s tempting, especially when the need for a franchise sale is high, to simply agree with the
franchisee who insists on taking control of their own real estate process. But resist the urge
to give in. The franchise sale you make will be canceled out if the franchisee fails, resulting in
decreased royalty revenue and a higher risk of a lawsuit.
Instead, take the time and effort to firmly explain the real estate system you’ve put in place
for the benefit of your franchisees. Make sure your franchisees understand that this system
is proven and tested, and undergoes continual improvement based on best practices you’ve
gleaned with each new location you open.
Higher-Quality Locations With a Controlled Sales Process
In an attempt to make a quick sale, franchisors often fall into the pattern of telling potential
franchisees what they want to hear, namely: “We have someone in your area who does our
real estate.” The franchisee may be happy and relieved to hear this, even though using that
particular provider may not be in the franchisee’s best interests. And here’s why:
The majority of local commercial leasing firms represent landlords and tenants. This dual
representation lacks a fiduciary responsibility and is a conflict of interest. Thus, these agents
have more loyalty to local landlords who provide the listings, and who will continue to do so.
This long-term landlord relationship is more valuable to the agent than the handful of leasing
assignments they’ll see for franchise locations. Which means that local leasing agent is less
interested in finding the best location and negotiating the best terms for your franchisee,
especially in mid-sized markets where franchise locations are limited, than in pleasing the
landlord who fuels the agent’s long-term income.
New and emerging franchisors do not have the time nor the resources to train geographically
dispersed, outsourced real estate firms and leasing agents on their customers, concepts,
demographics, unit-level economics, and any unique aspects of high-volume locations —
particularly when the location of their next franchise sale is unknown.
Franchise Executives have a high moral obligation to ensure a franchisee’s monthly rent is
negotiated to be in the range of 5% to 10% of the average systemwide store revenue. Failing to
implement a controlled and standardized lease negotiation process can cause franchisees to pay
up to 20% in monthly occupancy costs and devastate your franchisee’s potential profitability.
A leading cause of franchisee attrition is turning a blind eye or blaming reduced store
revenue, rather than poor lease negotiation, for high occupancy costs. Lease negotiation
must be calculated and performed on the lowest common denominator that represents the
average store revenue of 60% of your franchisees. This strategy protects the profitability
of 20% of your lowest-performing stores, and maximizes the profitability of 20% of your
highest-performing stores. This standard of operational excellence can only be achieved by
recognizing the importance of utilizing one strategic partner who has mastered your site
selection and lease negotiation processes, and can execute immediately in all 50 states
once the franchise agreement is executed.
So, given the nature of leasing agent-landlord relationships and the barriers to training outsourced
real estate agents, how should you approach the real estate process with your potential new
franchisee? “We have someone in your area who does our real estate,” isn’t the right answer.
Beware the Local Leasing Agent
Franchise Executive Insight
Instead, let your franchisee know that you have developed a standardized real estate
process based on years of experience as a franchisor. Tell them that this proven process
includes proprietary methods for selecting the most strategic site, negotiating favorable
lease terms, and performing a thorough legal review to ensure the best location and
economics for your franchisee.
Explain that your company collaborates closely with a single real estate firm that supports
your real estate specifications and guidelines. This strategic partner in commercial leasing
understands the unique nuances of finding locations and negotiating leases that work to the
franchisee’s advantage. What’s more, this firm has equal access to all vacancies and pocket
listings within your local market.
Let your franchisees know that this partnering real estate firm will fly into their market, at no
cost to the franchisee, to identify the highest-quality location, then work on the franchisee’s
behalf and in their best interests to negotiate a lease that adheres to your high operating
standards (the same standards you’d apply to a corporate store). Once the franchisee has
indicated their preferred final site selection and has executed a Letter of Intent, you as the
franchisor will approve or disapprove the location. If approved, your strategic partner’s legal
team or a local attorney will then review the landlord lease.
The Right Answer: A Strategic Partner
Each Rural, Medium,
Metro, and Major
Metropolitan Market IS
Different, but the
Real Estate PROCESS
Is the Same
By adopting this process, and sharing it with your franchisees, you are offering the highest
quality of real estate services to your franchisees to support their success in their new location.
At the same time, you also secure legal protection for yourself by requesting the following:
1. Franchisee agrees to a waiver within the Franchise Agreement acknowledging that you
as the franchisor are not responsible for the operating results of the final location.
2. Franchisee signs a Tenant Representation Agreement with your third-party, strategic
real estate partner executing your franchisee’s all-in-one site selection, lease
negotiation, and legal review services.
3. The franchisee makes a final decision on what location they have decided
upon and executes a Letter of Intent with the landlord.
4. The franchisee will sign a separate Legal Engagement Letter with an attorney to
gain further legal advice and counsel on the final Landlord Lease Contract.
5. The franchisee executes a Landlord Lease accepting their own liability within
a corporate signature and/or personal guaranty on the location.
While liability cannot be eliminated entirely, regardless of how well your attorney drafts your
FDD, maintaining an involved, committed, and proactive relationship with your franchisees can
go a long way toward avoiding franchise lawsuits. The quality of your real estate process is a
key part of building this relationship.
Protecting Yourself While Promoting Franchisee Success
Franchise Executive Insight
Up to this point, we’ve focused on the importance of having a standardized real estate process
in place to support franchisee success. Now let’s take a look at the central components of this
process — as well as the potential costs of not having a process in place.
Franchisors spend much of their time and resources developing strategies and systems for
marketing, sales, training, operations, distribution, and supply chains. What they often neglect
to develop is a standardized approach to location, leasing, and legal processes.
Franchisors should absolutely have a highly detailed real estate operations manual that
clearly defines the specifications and guidelines for each of these areas: site selection, lease
negotiation, and legal review. Sharing this manual with the key participants in the lease
transaction (the franchisee, area representative, site selection specialist, franchisee’s leasing
agent, landlord’s asset manager, landlord’s listing agent, and two attorneys) will help prevent
inconsistencies, frustration, loss of time, and a guaranteed sharp increase in start-up costs
that cripple working capital.
Building a Successful Real Estate Strategy
& Legal Review
Let’s take a look at a sample franchisee lease assignment in which the absence of a standard-
ized process directly and substantially impacts the profitability of your franchisee’s business.
Presented with the option to rent a 2200 sq. ft. space, a franchisee opted instead for a 3000
sq. ft. space based on the leasing agent’s recommendation (after seeing the franchisee’s
excited reaction to the extra square footage). The additional 800 sq. ft. will have minimum
effect on the franchisee’s gross sales, and falls outside the low and high allowable (1700 sq.
ft.–2500 sq. ft.) for the business to maximize profitability. What’s more, the franchisee must
now pay an extra $2.00 at 800 sq. ft., or $1,600 per month, for a total of $19,200 per year.
Over a five-year lease term, the franchisee stands to lose $96,000 of profitability.
All this could have been avoided by having a trusted and trained professional, handpicked by
the franchisor who is experienced and has mastered the franchisor’s site selection process,
there to guide the franchisee to the right location and square footage.
The Pros of Using an Approved Professional
This handpicked professional will know the common mistakes in selecting a site — and how to
avoid them. They’ll know if a potential location is one intersection too far, on the wrong side of
the street, or in the wrong location within the shopping center. They’ll know that intangible
factors such as visibility, convenience, traffic patterns, and tenant mix — not just demographics
and lifestyle behaviors — are the key factors that make or break a franchisee’s store volume.
Only an experienced, approved, trained professional — one who exclusively represents the
franchisor — understands these intangibles on behalf of the franchisee. And only by
repeatedly representing the same franchise concept in each new market will that professional
know the right questions to ask, and the right time to ask them. Your franchisee deserves to
have a professional with this knowledge, experience, and insight gleaned through previous
location and site selection experiences working to protect their best interests.
The Cost of Do-it-Yourself Site Selection
Franchise Executive Insight
Let’s take another look at what a lack of a standardized process can cost your franchisee,
particularly when it comes to lease negotiation. In this scenario, the franchisor outsources a
real estate agent to provide services for a franchisee in the agent’s local market (the old, “We
have someone in your area who does our real estate” tactic).
This agent has not been expertly trained on your lease negotiation strategy or unit-level
economics, and will be used on a limited basis only when a franchise is sold in that area. This
agent has a low vested interest in, and little loyalty to, either the franchisor or the franchisee; his
main interest lies in closing the transaction and collecting his commission as quickly as possible.
With no expert guidance from a professional vested in the franchisee’s success, the franchisee
should expect to:
• Pay $1,600 per month in additional rent with $2.00 at 800 sq. ft.
• Pay $2,000-$10,000 in demolition costs to return the property to a vanilla shell
• Pay the entire cost of converting a raw or gray space to a clean vanilla shell (four
walls, drop ceiling/standard lighting, HVAC, and ADA bathroom)
• Lose up to 50% of the available/potential landlord-tenant improvement allowance
• See a significant reduction in savings related to rent abatement
To offset these kinds of costs generated by inadequate lease negotiation enacted by an
untrained, inexperienced outsourced agent, franchisees end up investing a significantly larger
amount of their allocated start-up budget and this substantially reduces their available
working capital. This could represent $50,000 to $100,000 of unnecessary expenditures before
the doors even open. Add to that these excess monthly rental costs, and you’re looking at
$19,200 less per year in the franchisee’s net profit.
The Financial Impact of a Poorly Negotiated Lease
A standardized all-in-one site selection, lease
negotiation, and legal review real estate
process will reduce the start-up costs and
protect the working capital of your franchisees.
Last but certainly not least, it’s critical to make sure your legal review process is as
standardized as your site selection and lease negotiation processes. Once a Letter of Intent
has been fully negotiated between the leasing agent and the listing agent, franchisors typically
offer inexperienced franchisees several options: review the lease themselves, hire a local
attorney to review the lease, or ask their leasing agent or broker to review the lease.
We argue that none of these options are preferable. Instead, as part of your high-quality real
estate services, use your approved real estate attorney — ideally, a professional who is trained
in all aspects of your real estate process — to carefully review the lease. Your attorney will be
able to identify opportunities to improve the contractual terms and flexibility of the final lease.
While there are no guarantees, landlords will often agree to more flexible terms related to:
• Corporate Signatures
• Early Termination or Kick-Out Clauses
• Good Guy Clause
• Expiring Personal Guaranty
• Refundable Deposits
• Improved Signage Provisions
• Negotiated CAM/NNN Costs
• Sublease, Assignment, and Relocation Clauses
Without this expert legal resource available, your franchisees will often feel forced to accept
the lease as is, unfavorable terms and all. Plus, consider this: If you were investing in a
corporate location, you can be certain you would ask your attorney to thoroughly review
the lease for missed opportunities. Your franchisees deserve this same scrutiny from a legal
expert familiar with your legal strategy.
Finding the Hidden Profits During Legal Review
Franchise Executive Insight
By now we hope you’re convinced of the need to adopt a standardized real estate process
that encompasses a clearly defined all-in-one strategy for site selection, lease negotiation,
and legal review. We also realize that as a Franchise Executive, you may not have the time,
resources, or capabilities to put this process in place.
We recommend that before you develop a process, you identify the right partner with your
values to help you build and implement your franchise real estate strategy so that you can
remain focused on your core business. As your strategic partner, we strive to embrace your
core values and commit to learning your business model as well as the CEO, which ultimately
protects you and your franchisees.
At FGP Commercial Leasing, we bring a corporate eye coupled with decades of franchise
and real estate experience to the table. Collaborating closely with you, we will leverage our
expertise and resources to:
• Develop a comprehensive real estate operations manual
• Define your standardized real estate process
• Communicate this process and its value to your franchisee
• Travel to your franchisee’s market to identify the most strategic locations and assist
with site selection at no cost to you or your franchisee
• Assess and evaluate potential locations in person with your franchisee
• Negotiate the most advantageous lease terms on behalf of your franchisee
• Provide your franchisee expert legal review of the landlord lease for a fixed fee
• Issue ongoing recommendations to improve your real estate process
Results are what count
It is not the name or size of a real estate firm that creates results, it is the experience of
the individuals of one team who are performing your standardized site selection, lease
negotiation, and legal review services for your franchisees.
FGP - Your Strategic Real Estate Partner in Commercial Leasing
Your Strategic Real
Estate Partner in
At No Cost to You
Franchise Executive Insight
Take advantage of our complimentary 5-week program.
Call 1.800.471.1682 today.
Upon a mutual commitment to a strategic partnership, we will assist in the develop-
ment of standardizing your real estate process. We will learn your industry, concept, customer,
unit-level economics, and overall location and leasing strategy. Once we complete our 5-week
program, at no charge to you, we will have earned your trust and have become your strategic
partner in commercial leasing.
Week 1: FGP Commercial Leasing will ask your executive team to complete our Preliminary
Leasing Questionnaire. This questionnaire will assist us in the development of the Real Estate
Week 2: FGP Commercial Leasing will interview select members of your corporate team to
learn your overall leasing and location strategy and identify areas for process improvement. We
will identify gaps and exclusions in your current leasing process that you may not know exist.
Week 3: FGP Commercial Leasing will submit a Summary Report of our findings and
recommended process improvements.
Week 4: FGP Commercial Leasing will prepare a complimentary, private-labeled Real Estate
Operations Manual that will include: site selection, site criteria, building requirements, floor plan
specifications, site package, lease process, sample LOI, franchisor addendum, signage, and lease
Week 5: FGP Commercial Leasing will conduct teleconferences to consult and train your team
on how FGP Commercial Leasing’s services will enhance your current real estate process.
RESULT: A long-term strategic partnership between our management teams. The culmination of
this 5-week program ensures a commitment to process improvement and offers the highest level
of trust, professionalism, and experience, all the while expanding a culture of healthy and