Franchising can certainly be less risky than starting your own business from scratch. The franchisor has already done a lot of the dirty work for you: they've created a strong business plan, they've built strong brand name recognition, and they're usually responsible for most of the marketing and advertising.
Before you can build upon their good work, however, you first have to figure out precisely where you're going to locate your franchise business. A good franchisor will work closely with you, but the marketplace is crowded with other franchisees, and there's plenty to think about on your own when you're scouting a location that will open the door to a profitable business. Studies in the past have shown that franchises can fail at a rate of more than 30 percent within the first few years of operation.
The old adage still rings true when it comes to franchising: location, location, location. Here's our guide to picking the perfect site that will allow you to become a successful franchisee.
Selecting a Franchise Location: Know the Concept Inside and Out
The first step is to understand the concept of your franchise business. "Because there are so many different kinds of franchises, when you talk about location, your considerations really depend on the type of business you're getting into," says Tom Pitegoff, a franchise attorney at Pitegoff Law Offices, which are based in White Plains, New York. To find out what makes your franchise business of choice tick, you'll need to work closely with the franchisor to learn the answers to the following questions:
- What drives traffic to the business?
- Who are its target customers?
- Where do those target customers live?
- How and when do those customers interact with the concept? (Is it a restaurant that caters to the business crowd on their lunch breaks? Is it an emergency care center that needs to be close to where people live and in a safe location for late nights?)
- Is it a destination concept? (Do your customers come to you?)
- Does it rely on impulse sales, and so is a highly visible location a must?
- Are your customers coming to you, or are you going to them? (In this case, location is less important and you might even be able to start a home-based franchise.)
Selecting a Franchise Location: Do Your Homework With the Franchisor
The reality is that each franchisor has its own specific set of requirements and regulations when it comes to selecting a site location. Everything you need to know will be spelled out in the Franchise Disclosure Document, but those documents can run upwards of 75 pages long. That's why building a strong relationship with your franchisor is so important.
Good franchisors (the type you want to be in business with in the first place) have already done a lot of the market research for you. It's in their best interest to keep track of demographics, and they'll share that data with you. They also have something you might not have as a first-time franchisee: experience. "We have the data to understand the market, but we also know what we've done in the past and how our business has performed in different areas," says Tariq Farid, the CEO of Edible Arrangements, a company based in Wallingford, Connecticut, which provides bouquets made of fresh fruit.
Many franchisors already have people on the ground in various regions, scouting out potential locations, keeping track of commercial development deals, and working with real estate brokers. "Quite often, the major developers are actually coming to us," says Les Winograd, a spokesperson for the international sandwich chain Subway, which is headquartered in Milford, Connecticut.
Investigate what sort of territorial protection you have, if any. "The common approach today with many franchisors, especially the more established ones, is to grant a location, but no territorial protection," Pitegoff says. Subway, for instance, does not guarantee an exclusive territory. They do, however, have a review process where interested parties are notified of an intention to open another location nearby, Winograd says.
On the other end of the spectrum is Noodles & Company, a casual dining restaurant based in Broomfield, Colorado, by which most locations are company-owned and company-operated. Noodles & Company is newer to franchising than a company like Subway, so it carefully selects which markets to expand to through franchising. "We're looking specifically for markets that are smaller than what we prefer for a corporate market," says Wayne Humphrey, vice president of franchise initiatives. "Or, we also look at markets that are very large so we can get critical mass more quickly."
Noodles & Company also guarantees franchisees a protected territory, within a one-mile radius. But if you think you've found the perfect site, be prepared to prove it: "We have a very stringent approval process," Humphrey says. "They have to make a presentation and sell it to us. We spend a lot of time with franchisees to get them thinking along the same lines we are."
Selecting a Franchise Location: Talk to Fellow Franchisees
Don't stop at the franchisor. It's a good strategy to solicit input from current franchisees as well to get a sense of the franchisor's management style.
For example, some of those prime commercial development sites might be difficult for a first-time franchisee to nab, because franchisors will want to give their best locations to franchisees with proven track records. "Initially, I think some franchisees get the impression that the franchisor will find the location for you," says Doni Pitchford, owner of a Subway restaurant in the Rochdale Village neighborhood of Queens, New York. "They did give me some sites to look at, but nothing of interest."
So, Pitchford took matters into her own hands. She happened to find a shopping center with a lack of healthy food options or restaurant chains with strong brand names. "You probably know your neighborhood better than they do," she says.
Selecting a Franchise Location: Carefully Evaluate Your Retail Site
What else makes a great retail-site location? More than half of franchises are retail businesses, for which location is especially important, says Phil Baugh, senior vice president of Baum Realty, which is based in Chicago and works with a number of large franchisors, like Potbelly Sandwich Shop and Haagen-Dazs. Think you've found the perfect site? Think again. You have some more homework to do:
Study the traffic patterns. Are you on a desirable side of the street? Baugh says that being on the sunny side of the street in the afternoon can make or break a Haagen-Dazs location. Consider the small details, like if drivers will have to make an unprotected turn across several lanes of traffic to reach your site.
Is there enough parking at your site? Make sure you visit the site at several different times during the day because there could be a popular restaurant in the same shopping center that monopolizes the parking lot during lunch and dinner hours.
Look out for your neighbors. In a typical suburban shopping center, you'll be sharing the space with a number of co-tenants, so do your research on them.
- Competitors: Think about your direct competitors, not just in your shopping center, but also within a close radius of it. Do you out-position them? (For example, Baugh suggests that if many of your customers are driving to you from a particular office park, you need to be closer to that office park than your direct competitors.)
- Demand generators: If there are companies similar to yours that are doing well and driving customers to your area, you probably have a greater chance for success too, Baugh says. "If there's a really strong Chipotle near you, and you're going after that same type of customer as a sandwich shop, it shows that there are a good number of customers in the market," he says.
- The tenant mix: Check out the other tenants in your mall, shopping center, or nearby area. "If you have a child care franchise and you're trying to attract parents and their children, you don't want to be next to a liquor store," says Jania Bailey, president and COO of FranNet, a Louisville-Kentucky-based franchise consulting firm. Try to find a space with companies that are complimentary to your product or service. If that's hair care, it might make sense to be near a tanning bed or a nail salon, she says.
- The anchor store: It could really benefit your business to be near a major store like a Wal-Mart or a grocery store, but your strategy shouldn't rely entirely on the biggest tenant of a shopping center to help drive your store's sales. That location could easily close or relocate, or it can even end up hurting you if it's monopolizing parking spaces.
Be financially realistic. In the end, a location is only perfect if you can afford it. "Sure, everybody would like to be at Rockefeller Center," Baugh says. "But it's really about understanding the economic realities of your concept." He says that for restaurants in particular, it's standard that 8 to 10 percent of sales would go to the total occupancy costs. "If you're above that, you've given yourself a headache even before you've opened the door," he says.
Selecting a Franchise Location: Recognize that Criteria are Different for Non-Retail Sites
Retail franchise businesses only account for part of the wide variety of franchise business options to choose from. For instance, Jani-King is one of the world's largest commercial cleaning franchises. Each one of its franchise owners is home-based, says Robert Kindred, a spokesperson for the company, which is based in Addison, Texas. "It's to make it as easy as possible for the franchisees, and to keep their costs down," he says. "We have regional offices to provide training, operations support, and marketing materials."
It makes sense to pursue a home-based franchise when you are going to your customers, rather than your customers coming to you. A similar business is industrial franchises, where again a highly visible or easily accessible location is of less importance.
Instead, you can focus more on finding a manufacturing facility or a warehouse with a low cost of rent. But in these cases, you still need to think about your target customers and select the territory with the greatest density of those customers, Baugh says.
Selecting a Franchise Location: Close the Deal With a Professional
Once you think you've got your perfect site, work with a real estate broker and a franchise attorney to seal the deal. "It's a very specialized science," Baugh says. "It's much more complex than looking at the size of the building and the rent. A lot of factors go into the site that could create a lot of headaches and cost a lot of money."
You can expect a good amount of support in the final negotiations from a quality franchisor. "I really didn't know what to look for in a lease," Pitchford says. "Subway did most of my lease negotiations for me."
You've spent most of your time focusing on selecting a site, but a professional will carefully examine details that you might easily overlook. For example, you'll want to make sure there are extensions on the lease, or that if a major tenant in the shopping center closes or relocates, that there is a provision to lower your rent as a result.
"They should really represent your best interests," Pitchford says. "They want to increase the probability of you being successful."