Franchise premises and the lease explained
For a storefront franchise, the lease can be a bigger commitment than the franchise itself. Here is what to understand before you sign either.
How does the lease work in a franchise?
Who holds the lease
- Direct lease, you sign with the landlord, most control, most direct liability.
- Occupancy under the franchisor's head lease, the franchisor holds it and you occupy, which affects your security and your exit.
- Either way, check for a personal guarantee, that is what turns a business liability into a personal one.
Align the lease with the franchise term
A common trap is a lease term that does not match the franchise term. If the lease runs longer than your franchise rights, you can be left liable for premises you can no longer trade from; if it is shorter, you may lose the site mid-term. Aim to align them, including renewal options, so your right to occupy and your right to trade end together.
Budget the premises properly
Premises costs, rent, outgoings, fit-out and a bond, are usually the biggest part of a storefront franchise's all-in cost. Factor them, and their annual increases, into your model, and confirm what the franchisor requires for the fit-out. Retail-lease laws in each state add protections and disclosure requirements worth understanding before you commit.
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Frequently asked questions
Who signs the lease for a franchise?
It depends on the system. In some you sign the lease directly with the landlord; in others you occupy under the franchisor's head lease. Either way, check whether a personal guarantee is required, as that makes you personally liable.
Should the franchise lease match the franchise term?
Yes, ideally they align, including renewal options. A lease that outlasts your franchise can leave you liable for premises you cannot trade from; one that ends early can cost you the site mid-term. Aim to have your right to occupy and right to trade end together.
Why is the lease important when buying a franchise?
For a storefront franchise the lease is often the largest and longest liability, frequently personally guaranteed, and premises costs are usually the biggest part of the all-in cost. On failure it is commonly the biggest debt left. Have it reviewed by a lawyer.
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