Growing a Franchise
From avoiding costly repairs to prioritizing an exit clause, here are key strategies for negotiating franchise lease agreements that protect your investment and set your business up for success.
Entering a lease agreement is one of the most critical decisions a franchisee makes. Your lease terms can directly impact your bottom line and long-term success, making it essential to negotiate wisely and prioritize protective clauses. 1851 Franchise spoke with several industry experts to gather insight into how to approach franchise lease agreements and protect your investment.
When negotiating a lease, franchisees should focus on clauses that address financial responsibility and provide long-term flexibility. Joseph J. Raetzer, president of Raetzer Consulting, emphasizes the importance of carefully crafted provisions.
“Focus on clauses that impact responsibility,” Raetzer said. “HVAC maintenance/repair and plumbing/drainage issues, for example, are two big ones that can impact your bottom line. There’s nothing like an unexpected $15,000 bill to replace a commercial HVAC system to make for a bad quarter!”
Raetzer recalls a case where drainage issues caused significant operational challenges for a retail store. Thanks to a drainage provision negotiated during the lease, the landlord covered the cost of core drilling and rerouting drainage pipes, saving the franchisee substantial expenses.
Franchisees often make costly errors during lease negotiations. Robbie Crosier, partner at Peters Kussmaul Crosier PLLC, highlights the financial pitfalls of not fully understanding terms.
“A common mistake is failing to understand the financial implications of CAM [common area maintenance] charges, which can lead to unexpected costs,” Crosier said. “Another frequent issue is not negotiating for tenant improvement allowances, leaving franchisees to shoulder expensive build-out costs.”
Additionally, Crosier warns about relocation clauses, which allow landlords to move tenants at their discretion.
“Missteps like agreeing to relocation clauses or overlooking unclear financial terms can destabilize a franchise and hurt its growth potential,” he said.
Even with the best planning, unforeseen circumstances may require franchisees to terminate or relocate their lease early. Adam Hamilton, co-founder of REI Hub, underscores the necessity of including an exit clause to protect your investment.
“If you have to shut down your business early, yet you are stuck in your lease for several more months without being able to do anything about it, that will force you to take a major financial hit,” Hamilton said. “It’s wise to get an exit clause in there, such as allowing subleasing if necessary.”
This type of clause ensures franchisees have options to mitigate financial losses, preserving their ability to pivot if circumstances change.
A well-negotiated lease can significantly enhance a franchisee’s success. Raetzer shares an example of a client who was opening a franchise in a historic building. The lease initially required the franchisee to handle costly architectural drawings for a blade sign. By negotiating, Raetzer secured a clause requiring the landlord to provide the drawings and handle the application for a small monthly fee.
“The client was thrilled they got their blade sign, which directly impacts visibility to customers,” Raetzer said.
The complexities of lease agreements make engaging experienced professionals essential. A franchise attorney or lease consultant can identify hidden risks and negotiate terms that align with your long-term goals.
“Engaging an experienced attorney ensures risks are addressed and that the lease aligns with the franchisee’s long-term goals,” said Crosier.
By taking these steps, franchisees can negotiate lease agreements that not only protect their investments but also position their businesses for sustained success.
Growing and selling franchises is difficult. No great franchise did it alone. Want to learn more about how 1851 helps franchisors grow their franchises with confidence? Visit www.1851growthclub.com and see what we can do for you.
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