Franchise Mama

Q: Is it okay to sublease from the franchiser or should I insist on a head lease?

A: Whoever holds the head lease has the most power. However, subleasing is very common and very acceptable in most cases. A franchisee client of mine had several stores in a small regional chain. When the franchiser went out of business, he almost lost his location altogether. As the subtenant or the subleasee, it can be beneficial to negotiate for the first right to lease the location if the franchiser goes broker or gives it up for any reason.

Q: Will the franchiser get me the best rental rate, free rent package and tenant allowance possible?

A: Not necessarily. Some franchisers do cookie-cutter deals that call for two months of free rent plus a $15.00 per square foot tenant allowance. A Lease Consultant may be able to negotiate much more for you. Unless you have negotiated accordingly, there may be no provision in the Franchise Agreement or the Sublease Agreement for you to receive anything the franchiser got. In one case, a franchiser negotiated for eight months of free rent but only gave the tenant three months free. The franchiser would receive a large tenant allowance from the landlord, build out the store – then sell the store to the franchisee charging him/her for all the buildout costs and, therefore, making a handy profit.

Q: I’m buying an existing franchise … should I take an assignment of the lease or insist on a new Lease Agreement?

A: If the current rental rates are below market rates, take an assignment. However, if you sense that the market has softened, then negotiating a new deal can result in a rent reduction. Either way, your offer to purchase the business should be conditional upon your satisfaction with the lease terms and landlord consent to your assignment or tenancy. If the lease only has a few more years remaining, don’t assume that the landlord will automatically renew your lease. One client offered to purchase a national quick-service food court outlet then sent me in to negotiate the lease terms. We discovered that the landlord planned to relocate the entire food court within a few years – meaning the purchaser would be paying full price to buy the store but also required to build out a brand new store in a few years in the same mall. Wisely, my client decided to pass on the business opportunity.