The Importance of a Lease Agreement When Buying a Franchise
When purchasing a business or franchise‚ your lease agreement will serve as one of the most influential factors in determining the profitability of your new business. In states such as New York and New Jersey where rents are higher‚ paying particular attention to your rent factor is critical.
Lease Agreement Factors to Consider
When the business that you are purchasing is a franchise‚ some additional lease agreement "due diligence" factors that you should consider‚ include:
- Is the Lease a Sublease. Whether or not the lease for the business premises is transferred to you directly (as the purchaser of the business and the new franchisee) or if the lease is held by the franchisor (as the direct tenant) and then to you‚ indirectly‚ as a subtenant. This is important because in instances where the franchisor has direct control of the lease‚ it is possible – if you breach or terminate the franchise agreement – for the franchisor to attempt to “step in” and take over the operations of the business that you are purchasing. Again‚ this concern only comes about in instances where you breach the terms of the franchise agreement;
- Is there a Lease Management Fee. Whether or not the franchisor charges a monthly lease management fee. This applies mostly in instances involving the franchisor’s sublease of the business location and constitutes‚ typically‚ an administrative monthly fee charged to you by the franchisor for being identified as the direct tenant on the lease;
- Restricted Lease Use Clause. Whether or not the leased business location may be converted to a non-franchised business location in the event of a termination of the franchise agreement; and
- Protected Territory. Whether or not the franchise agreement includes a protected territory (i.e.‚ a specified geographic radius or map located within a certain proximity to the business location) within which the franchisor will not sell any additional franchises.
Keep Special Situations in Mind
Your lease will serve as one of the most critical business assets that you will be acquiring‚ so you must get the terms right. If the business that you are purchasing is a car wash or gas station in New York‚ Long Island or New Jersey your lease agreement due diligence must also include an assessment of the property for potential environmental conditions.
Additional Steps to Buying a Franchise
There are many other steps to buying a franchise. To become familiar with all of the steps when buying a franchise we recommend reading "Steps to Take and Mistakes to Avoid when Buying a Franchise". Also‚ check out our free online video resource "Franchisee University".