If you are thinking about buying a franchise that requires a physical location, then you’ll likely need to secure a rental agreement. Negotiating a rental agreement is a key element to the start of most franchise ownerships, and it’s typically one of the largest financial expenses – so it’s important to get it right.
Keep in mind that a lease agreement isn’t based on what the tenant can afford, but rather on what the landlord needs to satisfy the mortgage and any other financial agreements while making a reasonable profit. At the same time, a lease agreement is negotiable and having a basic understanding of lease terms will help you with the negotiating process.
Frequently Asked Questions
Negotiating rental agreements is a large topic, but our aim is to answer common questions about lease terms as it relates to franchising.
Yearly Lease vs. Month-to-Month Lease – What Are the Commercial Options?
How long are commercial leases?
In general, landlords often prefer a longer lease to avoid the costs and time it takes to change tenants. While residential leases often have the option between a one-year lease and a month-to-month lease, commercial leases are often set somewhere between five and ten years.
Can I leverage the length of the lease?
Fortunately, franchise owners are looking for a long-term relationship. This high level of commitment is valuable and appealing to most landlords, and it should be leveraged in negotiating the price of rent.
Does the timing of the lease matter?
When negotiating your lease terms, it’s important to make sure your lease term matches the terms you agree to in the franchise agreement. For example, you will run into issues if the start date of your franchise agreement is sooner than the start date of the lease agreement.
What Are Some Things to Look For When Negotiating Lease Terms?
If you’re going to effectively negotiate your lease terms, then you’ll need to know what to pay attention to.
The Listed Size
Make sure you look for the word “approximately” in the Offer to Lease. While a few square feet might not seem significant, it can make a big difference in your ability to operate your business. Even just a few square feet less than you need in a particular space could cause problems as you try to execute the franchise’s design. On the other hand, if you end up with too much space, then you might spend more money on rent than your budget allows.
The Rental Rates
At the end of the day, rent can make or break your business. It’s an essential cost for businesses that require a physical location, and it’s one of the largest costs along with salaries and cost of goods. If you can’t afford your rent, this will inevitably lead to closing your business. It’s crucial to find a rental rate that works for your business.
Selling a business is another important reason to secure a decent rental rate. In some cases, a franchise will find that they can’t sell their business because prospective buyers don’t want to assume the rental rate that comes with it.
What Other Tenants Pay On the Same Property
It is insightful to know what other tenants are paying on the same property, but you shouldn’t expect to get the exact same rate as another tenant. As you negotiate your rental rate, you should consider the following reasons the rental costs will vary:
- Size of space required
- Length of lease
- Strength of the tenant (“Mom and Pop” vs. national franchise)
- Landlord inducements
- Timing
- Industry
- Physical location within the commercial rental space
Additional things to consider as you negotiate your rental rate include:
- Tenant allowance and/or free rent
- Operating costs
- Work to be done list
- Lease deposit
- Conditions
- Personal Guarantees
- Termination Rights
Preparing to Start a Franchise?
Anyone pursuing business ownership will need to create a business plan, which should include a thorough financial plan. Fortunately, your franchisor can provide you with a lot of the information you need. When you’re ready to negotiate a lease agreement, you will know exactly what you’re looking for in regards to the space and the rate.
If you’re interested in franchise ownership, you should speak to a FranNet franchise consultant. We will provide you with all the information you need to make an informed decision and guide you every step of the way. You won’t have to pay us a dime! Schedule your consultation today to get started!