Franchisees continue to hunt for stores for rent across the commercial real estate markets of eastern Pennsylvania, New Jersey, and Delaware. While these operators play a critical role in retail real estate, Equity Retail Brokers Principals David Goodman and Rob Samtmann have observed that not all franchisees take a professional approach to site-selection. The veteran retail brokers recently sat down for a freewheeling conversation about how a franchisee can ramp up their competitiveness as they find retail space and restaurant locations to rent with the highest potential for strong traffic and sales.
SAMTMANN: David, it seems to me that, with all of the disruption caused by Covid-19 over the past three months, franchisees have been among the most active tenants in our markets. Is that your sense as well?
GOODMAN: It is. Some of the national tenants have hit pause on their expansions, at least for now, but I continue to receive calls from franchisees asking me about properties I’m marketing for lease or sale.
SAMTMANN: Right. And on the tenant side, I’m certainly seeing the continuing demand for space among franchisees. And yet, over the years, I’m sure we have both observed a certain unevenness in the way different franchisees approach finding stores for rent, right? Not all of these operators fully understand the critical importance of location, whether you’re opening a retail store, a fitness center, a restaurant, or whatever the franchise business happens to be.
GOODMAN: That’s right. There are big differences among those franchisees. Part of the reason is that different franchisors [the larger companies that license local franchise businesses] are very different as well. Some franchisors walk inexperienced operators through the entire process of finding a store for rent. Others provide limited support with respect to things like what happens after a lease is signed, working with townships to get the store open, and how to buy equipment.
SAMTMANN: Yes. And the thing is, these franchisees are paying notable fees that are often well in excess of $50,000. They’re getting vetted financially and doing their own due diligence on the concept itself before buying into the company. However, real estate, which is so important, can end up being a forgotten part of the conversation. You still have franchisees going it alone and making critical real estate decisions based solely on having driven the neighborhood and looking at signs in vacant storefronts. The franchisee may think finding a retail or restaurant location for rent is as simple as scrolling through an online listing service, choosing a favorite location, and pulling the trigger.
GOODMAN: Some of these types of online commercial real estate listing services have degraded in quality substantially over the past two or three years. They have far-fewer properties listed. You’ve also got the phenomenon of franchisees using residential brokers—often family friends—to try to find space for lease and negotiate that deal.
SAMTMANN: Absolutely. You see it all the time. Or the franchisee may not use a broker at all.
GOODMAN: I’ve had friends ask me to help them sell their house. They’ll say, ‘Well, you’ve got your real estate license, right?’ I have to explain to them that I’m a commercial real estate broker and that by listing their home I would be doing them a disservice. Residential is a different animal.
SAMTMANN: Absolutely. That has happened to me, too.
GOODMAN: The thing is, within the franchise world, your competition as a beginning entrepreneur is going to include very large franchisee companies—you’re talking about operators with substantial portfolios of retail or restaurant locations. On the landlord side, I’m doing two deals right now with a franchisee that has over 200 locations. Operators like this understand the need to leverage the best site-selection methodologies; they know to work with professional retail brokers.
SAMTMANN: Right. I think about the analogy of digging a ditch. A professional brokerage firm has access to data analytics, market knowledge, negotiating experience, brokerage networks, and other resources. That 200-unit franchisee, by working with a professional broker, is digging that ditch with a backhoe. If you just grab a friend who is a residential real estate agent or an inexperienced retail real estate agent, you’re effectively digging with a teaspoon.
AT THE NEGOTIATING TABLE: WHY FRANCHISEES NEED A PROFESSIONAL BROKER
GOODMAN: You know, Rob, the other thing worth mentioning here: Pretty frequently I’ll be at the negotiating table representing the landlord in a deal involving a franchisee, and that franchisee will not have professional brokerage representation. Invariably in that situation, you’ll see franchisees accepting terms that are going to translate into a waste of money for them. I’ll think to myself, ‘Man, this person needs a broker.’
Now, landlords need their tenants to succeed. As a broker, you always want to make sure there’s a partnership between the landlord and the tenant. In some cases, when a franchisee is not representing its own interests properly, I will actually huddle with the landlord to make sure the terms of the deal don’t translate into an unnecessary burden for that operator. I shouldn’t have to do that.
SAMTMANN: No, you shouldn’t. There should be a tenant rep agent there who is already on top of those issues. Another critical thing that franchisees often miss is that there is more than likely a listing agent involved in the deal anyway. That fee is already baked into the cost. It’s a fallacy to think you’re going to save money by going it alone. Quite the opposite.
USING MARKET KNOWLEDGE TO FIND A RETAIL SPACE TO RENT
SAMTMANN: David, you talked about partnerships. Some franchisees may not fully appreciate all of the different ways retail brokers partner with their clients to provide service. We’re a counselor, a resource, a research department, and more. We’re their connection to the retail real estate industry and what’s happening nationally, regionally, and locally.
GOODMAN: Market knowledge makes a major difference. Listing services are only part of the picture. You and I talk with landlords each and every day about things like which spaces are about to come open. For an unrepresented franchisee who is just driving around and/or looking online, those avenues are closed.
SAMTMANN: To your point, one of our agents, Rachel Bliss, is calling around to landlords as we speak. We’re representing a major pizza franchisee as it seeks to open several new locations in the markets we serve. While pizza tenants are abundant in local shopping centers, they’re not all created equal. Rachel is calling these landlords and saying, ‘Hey, I know you’ve got a pizza place there. How are they doing? Because we’re representing a very strong, expanding operator in this category.’
GOODMAN: Right. And you can make the same type of call if the center is 100 percent leased. You never know when second-generation restaurant space or some other vacancy is imminent.
SAMTMANN: Sure, and Rachel is doing that as well. The unfortunate reality is that Covid-19 and the resulting economic pressures are really revealing some of the cracks in underperforming operators right now. Some tenants just don’t have a strong enough foundation to survive.
And, of course, we also routinely talk to other brokers—listing agents with multiple potential real estate opportunities for franchisees. It’s amazing what comes out of those conversations.
HOW FRANCHISEES SHOULD CHOOSE A PROFESSIONAL RETAIL BROKER
SAMTMANN: There’s another point here around how to choose who you work with. For a lot of franchisees, the first step is to look at storefront signs and start calling broker names. But retail brokers do different things. Some have a reputation for listing a lot of properties; others specialize in helping tenants find new locations—including negotiating the deal.
Franchisees should talk to several potential candidates and ask those brokers poignant questions: Do you represent tenants? How many do you represent? Who do you represent? How long have you been doing this? What kind of advanced tools are you using? The tenant has to be an active participant here.
GOODMAN: And it’s not just about the qualifications of the broker: The tenant has to have its act together, too. It’s a two-way street. If you want to work with a best-in-class brokerage firm, you need to have your act together. That means, for example, being able to present your financials in an organized manner to landlords at a moment’s notice.
SAMTMANN: What does their business plan look like?
GOODMAN: Exactly. The franchisor should help with that, but if not, the franchisee has to be on top of it. Rob, I know that as a tenant rep broker you never want to start negotiating a deal and then realize that the franchisee is chronically disorganized.
SAMTMANN: Absolutely not. I want that tenant to be able to work with that landlord again. We’re not in the business of burning bridges. We’re in the business of building them.
GOODMAN: When I’m representing landlords and a tenant calls and asks me to help them make a connection with one of those owners, I’ll often say something like, “OK, so you must have a business plan then, correct?’
SAMTMANN: And sometimes you get silence.
GOODMAN: Yes, and in those cases what I’ll say to them is, ‘It sounds like a great concept. However, the landlord is probably going to want to see a business plan.’ I may even direct the tenant to small business resources that can help get them started, and they can circle back with me when that task is accomplished.
SAMTMANN: And that’s really the theme of this conversation: As a franchisee, you want to strive for professionalism at all levels. To qualify financially as a franchisee, you’ve likely hired an accountant to give the franchisor the information it needs to vet you. Next, you had to hire an attorney to review the franchise agreement. So why wouldn’t you have a professional broker handle the critical steps of finding that retail location and negotiating the deal? Your location and deal terms are simply too important to leave out.