Congratulations! You successfully surveyed the marketplace, jumped through several financial and logistical hoops, and have finally been accepted as a franchisee of a major corporation. Now all that is left is finalizing your commercial lease, hiring your team and getting on with business.
Before you sign your lease, though, you should carefully review it in consultation with your lawyer. There are several pitfalls that could put your budding franchise in jeopardy if not handled appropriately. Here are five of them.
1. Not calculating the full cost of your rent
Be sure you understand exactly what your rent covers. In particular, clarify whether the rent includes common area maintenance (CAM) fees. If not, you will need to add that expense to your monthly budget (along with taxes and rental insurance). Additionally, ask your potential landlord about rent increases and do the math on them. You could price yourself out of the building in just a few years if you are not careful.
2. Failing to ask for exclusivity
If you are the first franchisee of your kind to open a store in this particular shopping center or development, that’s great! However, your success could attract others in your market to the area before long. Without specifying your exclusivity rights, your commercial landlord could lease space to your competitors – perhaps just next door or down the hall – cutting into your profit margins.
3. Failing to understand the consequences of default
Every commercial lease has default clauses to protect the landlord’s interests should your business flounder. In some cases, those consequences include eviction from the property. They could also spell liability for your franchisor and therefore impact your franchise agreement. Make sure you read this clause carefully so you fully understand what happens if you fall behind on your rent or fail to live up to other obligations of the lease.
4. Overlooking the personal guaranty clause
Along with default clauses, most commercial landlords will also require a personal guaranty from new businesses looking to rent space on their premises. Even if you sign the lease as a franchisee of a well-known brand, you will likely be asked to provide a personal guaranty, meaning the landlord can make a claim against your personal assets should you fall behind on rent, CAM fees or other obligations. Review this section of the lease carefully before proceeding.
5. Choosing a storefront specifically for its unique features
Shopping center management reserves the right to relocate businesses as needed to meet its own goals. This is likely not something you can change or negotiate out of your lease. Therefore, before renting a space, make sure that you are not choosing the location based solely on its unique features or its specific location in the center. Instead, specify in your lease that any new location must include the basic features that you need to run your franchise successfully.