Reprinted From The Franchise Handbook
By Richard J. Brunelli
Richard J. Brunelli is the owner of R.J. Brunelli & Co., specialists in retail leasing, a company he founded in 1976. Based in Old Bridge, NJ, R.J. Brunelli & Co. is widely recognized as New Jersey’s leading retail real estate brokerage firm. The company has been the exclusive broker for more than 25 shopping centers with a combined 3 million square feet of retail space.
Once a franchisee has selected a franchised business, he must then determine where, based on the products or services he will provide, there is a market for that business.
The most logical place to locate the new business is near the franchisee’s home, but he must be aware that population density is important. If it is low near where he lives, then he is generally better off commuting to an area where it is higher.
Since most franchises tend to draw their customers from a local rather than a regional area, a franchisee might want to study an area with a radius of one, two or three miles. The best way to do that is to contact a company that specializes in providing demographic data on specific areas. Such companies as Urban Decision Systems, National Decision Systems, CACI and many others can provide a demographic study of any area in the country, usually for about $100.
The franchisee should then identify several areas that look like they can support his business, and he should try to get a feel for them by comparing them against each other. The franchisee should go out and take a survey of all the similar businesses in the areas he is considering. Too often, franchisees do not conduct as scientific a search as they should. They end up going out and looking around, finding a vacant store, and then renting it without giving sufficient consideration to things like demographics, population density, traffic, and competition.
HOUSE HUNTING
In some respects, conducting a site search is very much like house hunting. Just as most people realize they shouldn’t buy the first house they look at, they should also be wary of making too-quick a decision about where they will locate a business.
Location is of paramount importance to any business. A franchisee should look at a minimum of three or four locations before choosing one. The search process does not have to take a lot of time. Demographic studies from the major companies generally are available overnight. Most states have a department of transportation that can supply you with the daily traffic count in front of any location. That information is vital, for most businesses, traffic equals sales.
Once you have identified a site that meets your criteria in an area that has a need for your business, your next step is to contact the owner or broker. If the store has a “For Lease” sign in the window, there is usually a phone number for you to call. Contact someone at that number and tell them you are interested in the site.
Sometimes, a landlord’s representative is given parameters concerning acceptable commercial tenants. For instance, the representative might be instructed not to lease the store to someone who has never been in business before. It is important to get yourself qualified right off the bat in the eyes of the representative by telling him about the franchise chain of which you are a part, as opposed to fielding a lot of questions about yourself. You have to make the landlord understand that you are part of a larger organization, so don’t call before you secure your franchise.
The next step is to set up a meeting with the representative so you can make a presentation about your business. Most franchisors provide their franchisees with
“Location is of paramount importance to a business.. Look at a minimum of three or four sites before deciding.”
printed material about their franchise. This can be helpful in convincing the landlord that your business is a viable one. Your goal is to get the landlord’s representative interested enough in the concept so that he will want to go further, i.e., discuss rents, terms, etc.
Once you have passed that hurdle, you move on to the actual presentation of your business plan. At our company, we always ask small chains and first-time franchisees to develop a retail business plan. This describes the franchisee’s target market by age, income level and housing, explains how he plans to service that market and provides other information relating the location to the market.
The business plan should also include a list of the brand name products that the franchisee will carry, the number of square feet to be devoted to those products and a list of price points, ranging from the lowest to the highest, to be charged for each item. This information helps determine what type of location offers the best chance of success for a franchisee.
The third part of the plan includes calculations regarding the total square footage needed to operate the store (including storage area, fitting rooms, display area, etc.) and the basis on which the calculations are made. Too many first-time franchisees think they need more space than is really required. It is a big mistake to open a store that is too big to fill with goods.
FINANCIAL INFORMATION
Finally, the business plan should include an economic proforma covering leasehold improvements, equipment, working capital, merchandise and inventory. Leasehold improvements include anything that is attached to the premises being leased, such as carpeting, wall decor, special lighting and electrical work, custom ceiling work, custom store front work, partitions, counters, outdoor signs, attached fixtures and custom heating, ventilation and air conditioning work.
Equipment costs can include cash registers, gondolas, moveable fixtures and any miscellaneous equipment. You also have to add up what the cost of merchandise and inventory is going to be in order to start the business. The final item, working capital, is tricky. To figure out how much working capital you need to offset negative cash flow in a new business, you must prepare a full year’s worth of projections on a month-by-month or week-by-week basis. Those projections must take into account such things as franchise fees, mark-downs, advertising and other business costs, depending on the type of operation.
“One of the most common reasons start-up businesses fail is a lack of working capital during the first year.”
One of the most common reasons for start-up business failure is lack of enough working capital to make it through the first year. It is amazing how many prospective tenants approach a landlord without a business plan, or with a business plan that lacks a financial statement. Your personal financial statement should be prepared well in advance of any serious negotiations with a landlord.
In some cases, the business plan should also include a design sketch prepared by a professional store designer. The franchisee must be satisfied that he can operate out of the store for which he is negotiating.
In the case of a new franchise or one that is new to a particular area, it may be helpful to supply the landlord with the names of successful similar operations, since he will not be able to go out and look at any existing units.
Providing him with those alternatives just might swing the balance in your favor.