Choosing the right location for your franchise
An appropriate location for your business can make it or break it. One of the major decisions in your life as an entreprenuer is deciding on which type of business to run, how many locations to set up your business, and lastly, the location of each of your business sites.
There are two types of location analysis: figuring out a broad region where you want to operate in such as names of counties, towns, zipcodes that seem interesting to you based on the profile of your customers, market research and compile a demographic breakdown of the geographical area.
Once you have a list of zipcodes that seem interesting, you have to consider a street and property level analysis and that is what we will discuss in this article.
Key points for location selection
In addition to looking at the bigger picture when selecting the location for your business, you’ll need to analyze a wide range of additional factors, which include the following.
Costs and fees
In addition to monthly rent, as a franchisee, you’ll have an assortment of other real estate-related fees that must be calculated into your overall budget.
In addition to the base rent which is calculated based on square footage, you may be responsible for common area maintenance fees, real estate taxes, and merchant association dues, or you may have to pay the landlord a percentage of your sales.
All of these fees should be spelled out in your lease and reviewed by your franchisor, financial advisor, and attorney before you sign the lease. Hidden costs that are not
calculated into your budget can throw off your financial projections dramatically.
Ease of access and convenience for customers
How easy is it for customers to reach your location, park their cars, and gain access to your business?
Is the location you’ve selected truly convenient to your customers?
Will customers have to travel out of their way to do business with you?
Keeping in mind that customers are rather lazy and not inherently loyal, will the location you select attract your target customers and keep them coming back?
As people drive by your location, will they be able to slow down and turn into your parking lot or driveway?
High visibility
One of your biggest and best marketing tools as a franchisee is the location itself. Between the size of the building you’re in and the signage you put up, you want your location to have as much visibility as possible and to fully utilize the brand recognition of your franchisor.
Ingress and egress
These terms refer to the entrance and exit of the location itself, in terms of convenience, ease of use, and functionality.
Nearby competition
How much competition is located within a short distance of your proposed location? How will this competition impact your sales and traffic? Does your competition have a better location that’s easier and more convenient to reach?
Other draws to the location
What anchor stores, for example, can you count on to generate a constant flow of traffic to your location? Do these draws attract your target customers? How can you benefit from the draws?
Parking
Parking is a huge issue that can greatly impact the convenience (or inconvenience) a customer experi- ences when visiting your location.
Can customers park directly in front of your store, or will they have to park their cars and walk in order to reach you?
Is there ample parking nearby, or will customers have to circle around waiting for parking spots to open up?
Security
Does the location offer a safe environment for your employees and customers? If the area is perceived to be dangerous, this could keep customers away from your location.
Signage
How much signage will you be able to utilize to promote your business? What size signs? Where can they be located? Can the signage be seen from all directions? From what distance will the signs be seen? Will the signage have to conform to specific guidelines from the landlord?
Size
Even if the location is ideal, the size of the space must also be suitable for the type of business you’ll be operating. If it’s too small, you could lose out on revenue or may not be able to operate efficiently.
If it’s too large, you might wind up spending too much on rent and may not be able to fully utilize the space. Follow the guidelines from your fran- chisor in terms of space requirements—and stick to them.
Tenant mix If your business will be located in a mall,
shopping center, or strip center, for example, who are the other tenants? Are any of them your competition?
Conversely, will any other tenants help your business attract its target customers?
Traffic
Traffic is a calculation of how many people walk or drive past your location on a daily basis.
Keep in mind that even if the general traffic is in the thousands of people, not all of these people are considered part of your tar- geted customer base.
Zoning
Based on local laws and zoning, will your business be allowed to operate from the location? Will you be able to acquire local licenses, permits, and so on? This is an area where your Realtor and attorney will be helpful.
Checking Franchisor restrictions in UFOC
One of the first decisions you and your franchisor will need to make related to location is what type of site is most suited for the business you’ll soon be operating.
You also need to define how much space you’ll need, plus determine some of your other requirements that relate to the location. This information should be provided by your franchisor, including within the Uniform Franchise Offering Circular (UFOC).
Non-traditional sites
A non-traditional site refers to franchise-based business operated from places like an airport, train station, stadium/arena, or school campus, or near a tourist attraction.
These sites tend to be small, sometimes kiosk-based, and often allow you to reach a captive audience of customers (such as airline travelers navigat- ing their way through a busy airport).
Downtown retail area
A downtown retail area is a retail-based location in the heart of a city, town, or community that is not part of an indoor mall or strip center. For example, it can be a store found along Main Street,broad st etc. in Any town in US.
Because your site is in a busy part of town, it’s regularly exposed to a high volume of driveby and pedestrian traffic, and it benefits from high visibility.
From a franchisee’s standpoint, one drawback to this type of retail location is the potentially high rent.
As with any loca- tion, you also need to concern yourself with whether the local traffic (driveby and pedestrian) includes your target cus- tomers, and whether there’s easy access to your store and nearby ample parking.
Busy downtown areas are often con- gested and have inadequate or inconvenient parking for customers.
Retail mall
Malls are indoor, fully enclosed, and centrally located shopping areas that contain dozens, perhaps hundreds, of individual retail stores and one or two major department stores (called anchor stores), as well as restaurants and, typically, a food court.
Malls also often contain several kiosk-based businesses.
Indoor malls are typically filled with franchise-based busi- nesses, as well as with popular chain stores. A successful mall draws a steady flow of traffic throughout the week, offers plenty of convenient parking, and hosts ongoing special events to draw additional traffic to the mall.
From a franchisee’s standpoint, malls can be very attractive sites because of the steady flow of traffic.
The potential draw- backs include not just the potentially high rent, but the addi- tional fees that mall tenants are required to pay, including a common-area maintenance fee, a mall-wide advertising/mar- keting fee, merchant’s association dues, and perhaps even a per- centage of profits.
Businesses that operate within malls are also typically required to remain open during all hours the mall is open, which can mean operating from 10:00am until 9:00pm or 10:00pm Monday through Saturday, a partial day on Sunday, and extended hours during the holiday shopping season.
Another drawback to locating your business in a mall is that you may encounter significant competition within that mall, unless you negotiate an exclusivity deal with the landlord, which, as a franchisee, may be difficult.
Many malls across the country are dying a a slow death as the anchor stores are shutting down. You need to keep this in mind if you are thinking about signing a multi year lease at a mall. Carefully look at the financial health of the anchor store at the mall you are interested in and than decide if its right for you or not.
You can also ask a data analytics company like Specrom Analytics (Specrom.com) to generate a report on % of your franchisor’s stores located in malls vs in other locations. We can also help you look into types of store closures happening in your geographical area.
Retail shopping center or a strip mall
A retail shopping center (also referred to as a strip center or strip mall) is a string of attached stores located outdoors that share a common parking lot.
They’re typically anchored by a large supermarket, pharmacy, movie theater, or mass-market retailer (such as Target or Wal-Mart) that attracts a regular flow of traffic to that center.
Depending on the population density of the area, these types of retail centers tend to attract mainly local customers (people willing to travel only a short distance—say, less than five miles).
The advantage for franchisees is that rents are often afford- able, plus there’s usually space to display high-visibility signage.
From a convenience standpoint, it’s important that your location have ample parking directly in front of your store, in order to cater to your customers.
Ideally, your business should attract customers on their way to or from the supermarket or anchor store, for example.
Stand-alone retail location
This type of retail location is not part of a mall, shopping cen- ter, or downtown area.
It’s truly a stand-alone location that may or may not be located along a major street or busy thorough- fare.
As a franchisee, this type of location can provide its own set of challenges, because your business must become a destination for your customers.
In other words, your customers need to make a point to drive or walk out of their way to visit your business.
Hairstylists, oil change companies, automotive repair shops, pet service shops, and convenience stores are examples of businesses that are typically housed in these stand- alone locations.
Warehouse
Warehouse facilities are typically vary large, hollow buildings with few interior rooms.
They’re often located out of the way in not-so-busy, more industrial areas and have little or no commercial traffic.
This type of site is suitable for franchise-based businesses that have a lot of inventory, need an exceptionally large amount of space in which to operate, or are considered destination businesses, meaning that customers are willing to drive out of their way to visit them.
The benefit to franchisees is that warehouse real estate is typically inexpensive.
The drawback is that you’ll need to invest a lot into advertising and marketing to make people aware that your business exists.
A doggy daycare/boarding facility or furniture showroom is an example of a franchise-based business that might operate from warehouse space.
Single-unit franchises
A single-unit or direct-unit franchise is just what it says it is: As a franchisee, you obtain the right to own and operate one franchised business from a franchisor.
Most franchise systems have grown one franchise at a time. It is the classic method and, until the past few decades, was the most common type of relationship in franchising.
In a single-unit franchise, the franchisee (often along with family members) generally manages and supervises the business on a day-to-day basis. It is how their family makes a living.
Although a single-unit franchise is the classic method for franchise system growth, it does have some weaknesses for franchisors:
Franchisors generally experience slower growth with a single-unit strategy than with a multi-unit approach, and the growth can be more costly on a unit basis because franchisors have to locate a new franchisee for each location.
The franchisor has many franchisees to work with, and those franchisees may be less sophisticated and less interested in taking business risks than larger, multi-unit franchisees.
Because each location is individually owned and operated, single-unit franchises tend to be more expensive to support than when one franchisee owns and operates multiple locations.
In some markets that may be attractive to a multi-unit franchisee, the presence of single-unit franchisees in the market may make the opportunity less attractive to multi-unit operators who don’t want to compete for customers or locations.
Although there may be some disadvantages to franchisors, there are more single-unit franchisees looking for opportunities than there are multi-unit investors.
- Many franchisor organizations provide incentives that encourage single franchise operators to turn into multiple operators. On the flip side, many successful franchisors have also stopped giving out new franchisees to single location operator expect when they meet special requirements like women owned, veteran etc.
Also, because the locations are managed directly by the franchisee and generally are a significant part of the franchisee’s family income, single-unit operators tend to be better focused on operating their locations to brand standards and contributing to the neighborhoods in which their businesses are located.
That’s because they usually live in the community, their children go to the same schools, they attend the same churches, and their customers are their neighbors.
Organically growing single unit franchise into multiple locations
Many single-unit franchisees eventually acquire another franchise from the same franchisor.
After all, they have an understanding of the business, have a relationship with the franchisor, can project the return that an additional unit can generate, and know the types of locations that work best.
There is definately economy of scale when you open multiple locations; for example, initial training likely won’t be needed, and some of the key employees they already have may be perfect managers in their second and third locations.
You can leverage off of the prior locations by sharing staff, inventory, storage, and back-of-house resources like bookkeeping and payroll processing.
Investing in additional franchises is a terrific way to grow, because with experience their risk is generally lower than when they made their initial franchise decision, and even though they have more franchises, the relationship between the franchisor and franchisee is substantially the same.
However, growing one location at a time is different from agreeing to operate multiple locations from the beginning, because you don’t usually obtain a reduction in initial or continuing fees and you’ll continue to share the market with other franchisees.
It’s important to understand that franchisors will periodically update their franchise agreements, and franchisees who acquire additional franchises are likely to find variations between their original contract with the franchisor and the new franchise agreement for later units.
Your franchisor may also include cross defaults in the agreements, meaning that if you can be terminated at one location, the franchisor reserves the right to terminate all of your franchises at the same time — even if every other location is operating perfectly.
Multi-unit development agreement
You can choose to become multi-unit franchisees by entering into a multi-unit development agreement.
You will obtain the right and the obligation to open a specific number of locations during a defined period of time and usually within a specified contiguous geographic area.
A multi-unit developer will typically pay the franchisor a fee for the right to enter into a multi-unit development agreement.
As you sign a franchise agreement for each new location, generally a portion of the multi-unit development fee is credited by the franchisor against your initial franchise fee. (More on this shortly.)
Expect that your development obligations will be specific. For example, instead of simply agreeing to ten units over five years, your agreement will usually have precise dates that you must meet, such as requiring that you have your locations open and operating on January 1, July 1, and so on during the term.
These opening dates are important to the franchisor, so if you think the time provided for development is too restrictive or ambitious, this is something you and your attorney should discuss with the franchisor before you sign the development agreement.
Frequently, the initial franchise fee for locations developed after the initial franchise in a development agreement will be reduced from the franchisor’s standard initial fee. However, how the franchisor applies your development fee to the initial franchise fees you will owe varies from company to company.
In most franchise systems, as the franchisee signs a new single-unit franchise agreement and pays the initial fee, a pro-rata portion of the development fee paid will be applied to the initial franchise fee due. In other situations, you will receive no credit and you may pay the full initial franchise fee for each location.
The franchisor may offer a reduced royalty after a certain number of locations have been developed, and reduction in in training, site selection, and development fees are common.
You can also expect your franchisor to require you to have a general manager overseeing your units, and they may require you to have someone on staff to conduct the training of your staff.
Master Franchisee
When you become a master franchisee, you become a franchisor in an area and are authorized to offer subfranchises through your master franchise license.
In most master franchise relationships, the first thing you will likely be required to do is open and operate a few locations of your own.
Once that has been accomplished, you will then be allowed to offer franchise rights to other franchisees (called subfranchises) to open and operate franchises in your market.