Potential franchisees need to be aware of the many requirements that can be imposed upon their ability to determine the location of their store by their Franchisor through the Franchise Agreement. Additionally, if the Franchisee is leasing the location, the Franchisor may require that it participates in the lease negotiations to protect certain of the Franchisor’s interests or the Franchise Agreement may proscribe certain provisions to be included in each of the Franchisee’s leases. If you are currently a Franchisee and haven’t established a new location for some time, or if you became a Franchisee by taking over an existing location, you may have forgotten (or put less emphasis upon) the Franchise Agreement’s location and lease restrictions when you initially reviewed and agreed to the Franchise Agreement. For a number of very good reasons, Franchisors want to be able to protect their interests when granting franchisees the right to carry the Franchisor’s brand and business systems into a new market, however, some of these can make it challenging, (and almost all make it more costly), for the Franchisee trying to open a new location.
In almost every Franchise Agreement where the Franchisee will be providing retail goods or services to the public, the Franchisor will require some form of site review and approval process. The process may be as elaborate as requiring the submission of a full due diligence package including: extensive demographic data concerning the location and area surrounding the location (focusing on population demographics for a 5 mile radius around the proposed location); (ii) a formal market study; (iii) legal due diligence (title work showing any restrictions on the potential site and a copy of any recorded plat of the site). Submission of this package may be followed by a formal site visit by the Franchisor and/or coordinating meetings between the Franchisee, Franchisor and local officials to discuss any necessary zoning approvals or variances. Alternatively, the Franchisor may simply require that the Franchisee submit the address and a photo or two of the storefront and surrounding areas to the Franchisor. Frequently, in addition to bearing the cost of providing the due diligence required by the Franchise Agreement, the Franchise Agreement will specify that the Franchisee pay Franchisor a Site Review Fee (which is non-refundable, even if the Franchisor rejects the site) and require the Franchisee to reimburse the Franchisor for any travel expenses. While negotiating the Franchise Agreement, it is important to try to minimize the administrative and financial burden imposed by site selection provisions to the greatest extent possible. Also, when considering the costs related to a new location, it is more important for the Franchisor to make sure that funds are available to pay these expenses and, if possible, have the ability to seek reimbursement for these expenses by rolling them into any financing for the new location.
While the actual Site Selection process may seem daunting, the timing issues create greater concerns for Franchisees. While coordinating a typical project, the Franchisee must balance the requirements of the potential Seller/Landlord for the Site (and the Landlord’s mortgagee, if applicable), the Franchisee’s contractor, the Franchisee’s lender and the Franchisor. This process can be even more exasperating as due diligence checklists roll in from each party and many “chicken and egg” issues arise (such as when the Lender and the Franchisor both include as a condition to their final approval of the project, the final approval of the other). Documents requiring multiple party review need to be requested at the beginning of the process as it is never too early to circulate relevant documents. For example, copies of a Franchisor’s required specifications for construction and signage should be obtained at the beginning of the process (before Site approval is completed) to allow the contractor to prepare accurate cost estimates in time for lender review and approval.
Early communication with the parties and coordination of due diligence deliveries, for example, making sure that each party’s particular requirements for any particular piece of due diligence are all included when requesting a proposal for that item can help avoid delays. At the beginning of Site selection, the Franchisee will need to coordinate with their lender, contractor and Franchisor to map out mutually acceptable the key dates and the timing requirements and to coordinate a comprehensive final list of diligence materials to be provided.