Date: Thursday, 19 July 2007
- Workshopping issues such as: site selection and retention; dealing with shopping centre landlords; trends in securing sites through varying arrangements with landlords/franchisees etc;
- Brainstorming ideas on how to retain good sites in the event of the termination of the franchise agreement;
- Handling the complexities of securing a site and not having an approved franchisee, or vice versa;
- A panel of industry experts will share strategies and policies they have employed in dealing with these challenges.
FEEDBACK REPORT
Cape Town Networking Breakfast Feedback
Workshop discussions were held around the following issues:
Theme 1
Finding Sites/Franchisees
- Do you find it helpful to use a site evaluation company? Are there site databases you can purchase? Are they useful?
- Do you find it helpful to use a property broker?
- How do you hold onto a good site without yet finding the right franchisee?
- How do you hold onto a good franchisee without yet finding the right site?
- Do you, the franchisor, find the site or do you find it better for a franchisee to find his/her own site or both?
- What factors should one be aware of when selecting a site?
Theme 2
Legal Issues with Finding Sites
- Who holds the lease in your case: franchisor or franchisee and why?
- Are there ways that you can have some type of control over prime sites where a franchisee has signed the lease with a landlord and then debrands at termination of the agreement and holds the rights to the prime site?
- Do your franchise agreements and lease agreements tie in with each other? Is it feasible given differing durations of the agreement?
- Is there any recourse if a landlord kicks out the tenant at the expiration of the lease?
- How can a franchisor protect itself in signing an offer to lease without yet securing a franchisee? What if a franchisee pulls out at the last minute?
- If a franchisee defaults on lease payments what role should the franchisor play?
Theme 3
Shopping Centre Issues
- Are shopping centre sites the future for franchising locations in South Africa?
- Do you have a country development plan which prioritises roll out or do you go on a first come fist serve basis when sites come up?
- Is location within a shopping centre important to you?
- Are there ways that unrelated franchisors can band together to inform each other of shopping centre space available?
- Does it help to have a good prospectus to present to landlords?
- Is it ever worth paying out an existing tenant to gain a good site?
Members of the Panel:
Mickey Radowsky – Currently acting as an independent consultant to various retailers specializing in site selection and lease negotiation, as well as a general shopping centre consultant.
Allan Rubin - An attorney and partner at Bernadt Vukic Potash & Getz.
Responses were as follows from the panelists as well as the delegates:
1. Theme 1 – Finding Sites/Franchisees
1.1 Site evaluation:
| Companies finding sites in Cape Town |
| Databases for finding sites |
NB. These are tools but you need to make the decision!
1.2 Opinion on using brokers:
- They may have their own agendas as they are interested in commission.
- They might not know what is good for your business.
- Big brokers can give you information on rentals / turnover etc.
- Use property brokers only if you have specific site criteria.
1.3 Finding a site:
- Your business plan will determine if the site or franchisee should come first.
- If the right site is found this could be held by franchisor and either made to be company owned or held until the right franchisee is found.
- It is important to build relationships and contacts within the property market.
1.4 Criteria for selection of a site
“Location – Location – Location”
“Feet – Feet – Feet “
“Operator – Operator – Operator”
- Parking / Visibility / Anchor tenants / Demographics must be taken into consideration.
2. Theme 2 – Legal Issues
- Holding of the lease (franchisor / franchisee?). Depends on site location, risk return, profile of franchisor etc.
- Relationship between landlord and franchisor must be established – the lease agreements protect the brand and not the individual.
- Lease and Franchise Agreement should tie up if at all possible – if one terminates the other should.
- Franchisor should have right of first refusal when a lease terminates and this should be included in the lease agreement.
- Franchisors should actively look for locations and franchisees at the same time as they tie in together.
- When there is a default on the lease, the Field Service Consultant relationship should pick this up before there is a problem.
3. Theme 3 – Shopping centres
- Certain retail brands do not require shopping centre sites.
- There is conflict in terms of territory due to the increasing number of shopping centres. Protection of the brand is important.
- Country development plan is crucial.
- Determine which area of the shopping centre you need to be in accordance with brand requirements, and do not just accept any site.
4. Input from Guest Speakers
Points made by Mickey Radowsky:
- Franchisor needs to put together the right package to attract the right franchisee.
- It is beneficial to be a member of FASA. Recommendation that the franchise system is held up by this.
- Of the 50 prime shopping centre sites, it is near impossible to get in and franchisors should therefore be assisting their franchisees. An active franchisor should be looking for sites. Landlords prefer to speak to the franchisor.
- Shopping centres are being held by “cartels” – big companies. However, there is still a person behind this and contacts need to be made.
- Because landlords are powerful, they can be arrogant but you need to continue to “harass” them.
- Franchisors are risk averse and in most cases will not take the lease / bail out the franchisee / fund the franchisee unless they are prepared to be left with a company owned store.
- In new centres it is necessary to manage expectations. Most shopping centres take a few years to get on their feet and establish themselves.
- Lease and durations are abided by, and cognisance must be taken of this.
- Locations within shopping centres are also important – understand your customer and your neighbours.
- Landlords are not retailers who understand your business.
- Make the distinction between feet and customers when selecting a centre. Customers are those who actually come into your shop to buy whereas feet just pass by.
- Reiteration that the selection of the operator is crucial for success.
Points made by Alan Rubin:
- Restraint of trade on companies and individuals must be taken into account when a lease terminates and a franchisee potentially defranchises.
- A specific site can not be defranchised and rebranded, and there is recourse for legal action here.
- If a franchisor changes hands then the landlord must approve the sale of the business.
- It is possible to have terms in franchise agreement but it is difficult to negotiate those terms into a lease agreement.
5. Question and Answer Session
- QUESTION 1: What is the future in the strip malls / open air etc?
ANSWER FROM MR :
New types of open air centres are the flavour of the month but it will not change the face of the shopping malls – they will still be congested. It is a trend that will not dominate.
- QUESTION 2: What about the issue of draconian leases? Should franchisors put forward
their own lease?
ANSWER FROM MR:
Certain landlords will not accept these. Every lease can be amended. Agreements work both ways and it is up to the franchisor to get involved in the negotiation process.
- QUESTION 3: What about “Landlord tricks”?
ANSWER FROM AR:
Be aware of the following -
- Renewal options that are “unenforceable” are still in the agreement.
- Pro rata % of rate increases is included and the lessee is liable for this.
- Increase in rates is calculated as part of rent.
- Offer to lease might force you to sign and agree to standard terms and conditions, thus no negotiation later.
Be prepared to negotiate from the word go!
- QUESTION 4: What about signing surety? Is the franchisor surety valid?
ANSWER FROM AR & MR:
- Leases are excluded from new credit act.
- Be careful as to what you sign surety for – link it to the lease specifically.
- Landlords are requesting a 2 – 4 month deposit. A deposit is meant to be used for “damage” when the tenant leaves
- Do not sign an open suretyship.
- Security / Surety is different to a deposit.
- During process of litigation months may go by.
- It is possible to attempt a negotiation for a 6 month Suretyship.
- Negotiating is conflict but you must work on the deal.
- It is better to put up a guarantee (in cash where interest accrues to you).
FEEDBACK REPORT
Gauteng Networking Breakfast - July 2007
Workshop discussions were held around the following issues:
Theme 1
Finding Sites/Franchisees
Do you find it helpful to use a site evaluation company? Are there site databases you can purchase? Are they useful?
Do you find it helpful to use a property broker?
How do you hold onto a good site without yet finding the right franchisee?
How do you hold onto a good franchisee without yet finding the right site?
Do you, the franchisor, find the site or do you find it better for a franchisee to find his/her own site or both?
What factors should one be aware of when selecting a site?
Theme 2
Legal Issues with Finding Sites
Who holds the lease in your case: franchisor or franchisee and why?
Are there ways that you can have some type of control over prime sites where a franchisee has signed the lease with a landlord and then debrands at termination of the agreement and holds the rights to the prime site?
Do your franchise agreements and lease agreements tie in with each other? Is it feasible given differing durations of the agreement?
Is there any recourse if a landlord kicks out the tenant at the expiration of the lease?
How can a franchisor protect itself in signing an offer to lease without yet securing a franchisee? What if a franchisee pulls out at the last minute?
If a franchisee defaults on lease payments what role should the franchisor play?
Theme 3
Shopping Centre Issues
Are shopping centre sites the future for franchising locations in South Africa?
Do you have a country development plan which priotorises roll out or do you go on a first come fist serve basis when sites come up?
Is location within a shopping centre important to you?
Are there ways that unrelated franchisors can band together to inform each other of shopping centre space available?
Does it help to have a good prospectus to present to landlords?
Is it ever worth paying out an existing tenant to gain a good site?
Responses were as follows from the panelists as well as the delegates:
Initial requirements to approaching site selection
- You need a budget that allows you to capture good sites!
- One needs to ascertain how many sites one can find? Yr 1 / Yr 2 / Yr 3
- Scientific gap analysis completed?
- Prioritise certain areas.
- Do not take inferior sites just for the sake of obtaining a site.
- Formal site evaluation is out of the reach for smaller franchises – there are cost implications. However, it is imperative to make an upfront investment in order not to make mistakes especially further down the line – eg year 2. One should maybe build this capital investment into the initial upfront fee.
- Money spent upfront is an investment in the health of the franchise network.
-If scientific research is unaffordable say, for more low cost franchise opportunities, manual research can be done in the way of obtaining demographics/psychographics and priotorising areas/sites on an excel spreadsheet.
Audience comments / queries
- Country Development Plan for smaller newer franchisers is opportunistic – you take what you can get!
- To secure a site you can open a company owned store then franchise
- Focus on good operator FIRST – opens scope of sites as they can manage the poorer sites
- Securing a site before you have a franchisee is a risk to the franchisor.
Vic Snyders
- Landlord / Tenant relationship is adversarial and always will be!
- One needs to also understand where Landlord is coming from.
- The concept of the private landlord is disappearing – the “personality” factor is no longer prevalent therefore stereotyping of centres is taking place. Centres are being taken over by big companies who prefer to opt for a lower risk, “tried and trusted” shopping centre format store.
- There are 2 options when trying to secure a site:
1 . A centre that is not yet built –
- This will be sold to major investors for finance therefore needs pre-let arrangements in place (with a national and a franchise component. 70 to 80% of tenants have to be secured upfront).
- Any arrangements made in the name of a franchisee, as opposed to the franchisor,do not hold much water in this 70 – 80 % requirement.
- Therefore landlords look for big franchisors that will stand behind the lease agreement for surety.
- So, if a suspensive condition is finding a franchisee – landlords are not keen!
- You need to develop and keep a good relationship with brokers and investors
2. Existing centres -
- A quick decision is often required in order to secure the lease agreement.
- The landlord needs to let urgently as they can’t afford open and unoccupied space. So you need a franchisee or a franchisor who can conclude a lease as quickly as possible.
- The reputation for making these quick decisions starts to build and you will be favoured in future when space comes up.
- You need to develop a relationship with developers and property people, and to build a reputation.
- You need to know what sites are coming up WAY in advance.
- The property section of the franchisor business needs dedication or needs to be outsourced – it is too often neglected in small franchises.
- Where possible - speak to bigger franchisors - share experiences and make connections.
Audience
- The franchisor in question has a business model that is 250m2 but landlords require “preset” 80m2 for health shop. How does one go about overcoming the preconceived ideas of what will and won’t work?
Vic Snyders
- You need to convince landlords to break out of mould. Properties are controlled by listed funds and they do it statistically, and thus more often than not will choose the safer option. Make sure they read your business proposal/prospectus; take them to your existing shop that is working etc.
Stephen Walters
- Landlord needs to see the value in your offering. Put plans together to advertise your business.
Esmari Jonker
- The landlord wants stable occupational rental.
- The Franchisor may enter into a legal agreement with the following conditions:
- Put in condition for franchisee (time period) to be found.
- Franchisor to sign Suretyship.
- Advantage for franchisor in subletting premises to the franchisee is that the franchisor is responsible but has direct control and can cancel / vacate premises if necessary.
- Landlords and suspensive conditions depend on circumstances. You need to build up the trust where they will be willing to accept the suspensive conditions.
Audience
- If the franchisor signs lease, what suretyship does franchisee have?
Esmari Jonker
- Link franchisor to the lease agreement. Even if franchisor holds the lease the franchisee still has the franchise agreement in place.
- The possibility is that the franchisee can debrand if lease is in their name.
- A fair restraint of trade can help in this to prevent franchisee taking unfair advantage.
- Leases can be 3years and Franchise agreements are normally 5 years. It is best to try and link the two wherever possible.
- The landlord may not want to renew after 3 years, and the costs of relocation are incurred. Thus it would be best to get a renewal option on a 3 year lease for a further two year extension. Then it would tie up with the 5 years of the Franchise Agreement.
Vic Snyders
- The reality is that when leases end – rentals go up. Supply and demand /depersonalisation results in smaller tenants getting bullied.
- Franchisors and franchisees don’t spend enough time negotiating lease and this is critical. Both the Franchisor and franchisee are not completely aware of landlord rights.
- Take professional advice on lease agreements wherever possible.
- As a franchisor, take the time to develop a standard lease agreement – negotiate with major landlords.
- Landlords prefer to deal with franchisors and not franchisees.
Audience
- The combination of securing sites can be followed as a rule of thumb:
- High profile sites – franchisor signs.
- Low profile sites – franchisee signs.
Esmari Jonker
- Make provision for when lease / franchise agreement don’t tie up.
- Offer to lease is a binding agreement even if it is not comprehensive (common law for all other legal requirements). If nothing is signed thereafter then the offer to lease stands as the binding agreement.
- The offer to lease:
- Only legally binds the franchisor.
- If it is not accepted by landlord and signed by the landlord, then the time period lapses.
- Landlords get higher rentals and weigh up their options of various offers for the same premises – so you have to try and get him to sign yours.
- Where premises are leased to franchisee – put in franchise agreement that franchisor will take over site (sign cession).
- Remember that unless you have the option to renew in your lease there is nothing you can do.
In Summary:
- Invest upfront in research of sites.
- Try to use suspensive conditions in the offer to lease.
- The right franchisee is paramount, and the right site is also crucial for success.
- Franchisee needs to do micro country development plan
- Get in touch with property people and develop relationships.
- Be proactive!
- The best scenario is for the Franchisor to be securing sites