Opinions expressed by Entrepreneur contributors are their own.
One of the great truisms in the retail and restaurant businesses is that it’s all about “location, location, location.” You can fix bad systems, bad management and bad staff, but fixing a bad site is a challenge most companies should avoid at all costs.
Location is paramount
A bad location may save money on rent in the short term, but it will cost you more over time. The best form of marketing for any restaurant or retail store is its location. A good site also gives you two chances to make serious money — while you’re operating the business, and then when you want to sell the business. Don’t forget, a lease is a contract. If, for some reason, your business doesn’t succeed, you can’t walk away from the lease. You must keep paying for that shuttered store or restaurant until you negotiate an exit.
That’s one of the benefits of franchising — the franchisee owns and runs the business but has access to the real estate expertise and discipline of a much larger company, reducing time and risk.
Related: Become a Franchise Owner in 5 Easy Steps
Solo vs. franchising
Let’s imagine you want to open a hamburger restaurant. If you go it alone, you’d have to know site availabilities — are there any existing restaurants for rent or sale that fit your criteria? Finding those can entail subscribing to pricey real estate databases, and those databases won’t tell you why a space is available: owner retirement, changing demographics, or a poor operator.
Driving around the market won’t give you the most important information, either. Shopping center managers track their tenants carefully, know who on the rent roll is struggling (late payments, requests for relief) and already have a plan for when that lease is up. By the time you see a “For Lease” sign, it has already been picked over by the insiders — and they’ve passed on it.
Location demographics are crucial; you need to know where your target customers live or work and how far they are willing to travel for what you sell. Demographic reports also show how much people spend on categories such as restaurants, beauty, and pets. If you are opening a pet brand in a new market, you want to know where the highest concentration of your target customers is. Additionally, consider co-tenancies— what neighbors complement your offerings? Coffee and healthy foods often do well if they’re located near a gym or spa.
Market rents are another factor; the asking rents on listings could be real or wishful thinking on the part of the landlord. You need to compare that number to other nearby locations since factors like which side of a street gets afternoon sun can change the rent per square foot significantly. You also need to gauge how motivated the landlord is to negotiate. Do they need to get someone in quickly, or will they wait for the number they want? Zoning is important as well. Can the site accommodate the drive-through you need to succeed? Are there radius restrictions because the site is near a school? Will you need some easements? Finally, competition is a critical consideration. You might find the perfect building in the perfect neighborhood at the perfect price, but this could be undermined if your main competitor is just down the street.
Related: Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.
Smart analysis
One of the smartest forms of analysis is supply and demand in a market. A case in point is Times Square NYC, where everyone misfires. The area is so dense that restaurants pay five times more rent for that trophy site, only to see low sales. Why? Because of all the other restaurants in the area. Even weak competitors will still take some customers.
The easy solution is to work with a local real estate expert. But there are challenges, there, too — how do you find one? You can look up local brokers and contact them , but how many do you want to interview? Do you want to meet with someone relatively new to the business who will really want to help you, or a veteran broker who has a lot of market knowledge — but probably a lot of deals in the pipeline?
It’s important to remember that brokers are only paid when a deal is done. The industry pays 6% in commissions on the lease term. For example, an annual rent of $100,000 on a 10-year lease results in $1 million in gross rents paid to the landlord. The landlord pays out 6% of this, half to the listing rep and half to the tenant rep — $30,000 to each side. That’s significant money, and one reason why most tenant reps don’t like doing penetration plans. A really objective penetration plan tells you where you should go. But if there are no vacancies in that area, there’s no lease and they don’t get paid.
And what do you do when it’s time to invest in your second, third and 10th locations? Don’t forget, you’re investing your profits from your first location into more and so on, to build wealth.
the good news is, you don’t have to do this yourself. A franchisor has this expertise, and franchisees are paying for site selection and lease negotiations assistance. The franchisor knows what locations work, have relationships with brokers nationwide to help you negotiate and will help you avoid an oversaturated market. They won’t sell you a territory if it doesn’t need more units. That’s because for franchisors, a lease is an asset. (In fact, franchisors’ primary two assets are franchise agreements and franchisee leases.) They make sure they have the rights to sell a business including the proper assignability and transfer language.
The important thing to remember is that real estate is its own business for a reason, requiring market-specific knowledge and relationships. Franchisors have that knowedge and relationships and are eager to help.