What will you own, when it comes to your new franchise location, and what will belong to the franchisor? At some franchisees, the owners are wholly vested in everything, from the uniforms to the building itself. But other franchisors buy the location, lend or lease out equipment, and might even own the data a franchisee produces. When you’re comparing franchises, it’s worth considering what type of equity you’ll build as a franchisee. “Who owns the location?” is one of the questions you should ask while you’re deciding which franchise to choose.
While it’s pretty easy to see the benefits of owning the location of your franchise, there are benefits to franchisor owned locations. First, if a franchisor is dedicated to the success of all of their franchisees, they might take a loss on rent until your franchise is profitable enough that you can afford the location. High rents can make new businesses sink. A franchisor might choose to base rent on a percentage of sales or in other ways to accommodate you as you’re starting out.
If your franchisor rents the location for you, it can also mean avoiding struggles with your landlord. Often a large company will have more pull than an individual business owner and can get things fixed more quickly, especially if they own multiple properties with the same landlord or property management company. If the franchisor buys a location in a strip mall or other business complex, it can also mean they have some say in whether other direct competitors can open in the same area. And because your franchisor handles finding the right location and closing the deal, you can direct your focus on getting your franchise up and running faster than if you had to find it yourself.
The negatives, however, often outweigh the positives because they can make or break your franchise. If the location belongs to the franchisors, there might be clauses in the agreement that allow the franchisor to take the franchise from you and award it to another franchisee. A franchisor might see you as more of a manager than a franchisee if they own the location— even as a manager that can be fired if they’re not doing a good job. Instead of taking the time and dedication to make you a successful franchisee, they simply can replace you with someone they feel can do better. You can be left with nothing to show for your work.
The practice of basing rent on your revenue, which can be helpful when you start out, can seem less appealing as you grow and succeed. At that point, it can feel as though the franchisor is raising your rent so they can take a larger share of successful companies and mitigate losses elsewhere in their company, instead of having a fair market price for your location’s rent.
Franchisors might also make terrible landlords. One franchisee told us that his franchisor didn’t respond to concerns about roof leaks and parking lot problems. As a beginning franchise, he hadn’t yet justified a sizable investment on the part of the franchisor. From the franchisee’s point of view, however, problems with the location were keeping him from realizing his potential.
Clearly, there are potential pluses and minuses in both directions. The important thing is to go into the deal with your eyes open, aware of the costs and benefits.
