🍟 2/6/2023 – Don’t Forget About Real Estate

DEEP DIVE 

5 Real Estate Insights For Your Franchise Search

Most of you already know that real estate plays an important role in a brick & mortar business, especially for the owner. You also know that the goal is to own the land your business lives on. 

Unfortunately, the latter is easier said than done in many markets nationwide, as commercial real estate developers largely own the land where your franchise would be located (strip malls, grocery anchored shopping centers, urban markets, etc). 

Don’t get me wrong, there’s certainly ways to get into the real estate game – a franchisee of The Learning Experience did so by simply asking her landlord – but it’s harder than it used to be say, 20 to 30 years ago.

Regardless, knowing your market demographics and where you want your franchise to be located is still a critical part of the due diligence process, and arguably as important as picking the right franchise brand.

Yet, I still see many franchise buyers focusing solely on what brand they want to buy, and only thinking about real estate after they’ve paid a franchise fee and signed a franchise agreement

That’s like ordering a main course at a restaurant and letting the wait staff pick a side dish at random for you. If you ordered a cheeseburger, hopefully you get a side of french fries or onion rings. But since you didn’t do the research, your cheeseburger may end up coming with roasted asparagus. 

Now there’s nothing wrong with asparagus, but typically you’d get those with a steak..which gets to the point: your franchise brand should complement your market. 

Thus, if you’re researching franchises seriously, along the way you should also be scouting potential areas for where you’d consider setting up shop.

I’m far from a real estate expert, but below is a list of tips & tricks I’ve learned about how to approach real estate as it relates to franchise ownership. It should serve as a good primer for beginners in the franchise world.

So, without further ado..

1. “You can pay for a location once, or you can pay for it every single day”.

This quote comes from Benton Little, the owner of 14 Zaxby’s locations, including the #1 and #3 locations nationwide. 

For context, Zaxby’s has over 900 stores, and the average store does over $2.5 million. Needless to say, this guy knows his stuff.

His overarching point of that quote is that the prime locations will be more expensive, but if you cut costs and pick a B or a C location, that can cost you far more in the long term in the form of lost foot traffic and revenue. 

Good operators can only do so much in a bad location. 

2. Look For Lighthouse Tenants

A common strategy for many new retail brands, franchised or not, is to find non-competitive companies that overlap with your customer base, and locate as close as possible to them. 

The above tweet is an example of people doing it with Target, but it can be a variety of retail chains: Starbucks, popular grocery stores, etc.

In the early days of OrangeTheory, they tried to locate as close to Whole Foods as possible. 

Why?

Because they believed that the Whole Foods customer had the disposable income to afford OrangeTheory, and health consciousness to motivate them to sign up for their classes. 

It’s a great way to piggyback off the success of another brand, and it also can give some (not complete, but some) assurance that there is a good market of customers to support a business. 

After all, Whole Foods, Starbucks, etc. has very highly paid professionals analyzing markets and deciding where they want to expand. You may not be able to afford that kind of research, but locating near them means you don’t have to!

3. Study Your Market

Worrying about competitors isn’t a good strategy long-term, but it’s downright foolish to ignore the competitive landscape while buying a franchise. 

In a perfect world, you wouldn’t want to open a Dunkin’ in the heart of Seattle, or a new brewery in Dublin right next to St. James Gate (sorry folks, I’m realllly craving a Guiness right now).

If there’s absolutely no competitor in your market,  franchised or not, that can either be an amazing opportunity, or a major red flag. 

If you’re thinking of opening a lawn-mowing franchise, but there’s not a single landscaper in town, ask the question, why? It may very well be that you’re about to strike gold, or perhaps you’ll realize that every house has a backyard full of rocks just like you. 

On the other hand, if there are competitors, that’s not a bad thing per se. It means there is a market for the kind of concept you’re considering starting, so competitors with a history of longevity indicate that there are customers paying real money for the same service you want to offer.

If you think you can do a better job and take away market share (and better yet, expand the market interest), then you’re on the right path. 

4. Understand the Demographics

As I alluded to earlier, you can use businesses in your market to indicate certain demographics. Is your market more of a Starbucks & Orangetheory area, or an Anytime Fitness & Dunkin’?

But knowing statistics beyond the population in your area, such as average household income, average age, total households, average family size, etc. might be critical to understand before pulling the trigger on a brand.

Part of the process is understanding what drives customers to your business.

Is it a real need, such as an oil change for your car or a monthly grooming for your pet? Or does convenience play a bigger role (which is key for fast-food).

But the point is that the location combined with your brand matters. 

There are towns near where I grew up, where depending on which side of the town you lived on, would be a night and day difference from a demographic perspective. 

That difference can be the deciding factor between choosing a budget fast-food concept, or a fast-casual smoothie concept for a higher income customer.

Not all franchises are created equal, and not all locations are either!

5. Lease First, Buy Second

This comes from Benton Little again, as he acknowledges that it’s difficult to be able to afford real estate ownership. 

I know a lot of times real estate is a really big expense. I get that part. I’m not saying you have to go out and do it for location one, but you know, if, if you get location one up and running and you get it finally cash flow positive and everything’s looking good, I would highly, highly encourage you to try to acquire the land with location number two”.

Maybe it’s lease first, lease second, and then buy the real estate on location #3. Or maybe you lease more than that – the point I took away is, don’t give up on owning the land. The benefits are too positive to ignore:

→ Numerous tax benefits

→ You can borrow against the equity value to buy future stores

→ Much more attractive to future buyers when you own the land (bad leases kill deals)

→ Can sell the land in sales leaseback transaction to fund expansion in a debt free AND non-dilutive way (i.e. no debt covenants, and no equity given up)

That’s it for me today. If you enjoyed or want to share any insights of your own, feel free to reply to this email and I can compile them as a resource for everyone!


FRANCHISE HEADLINES

Founder of Shake Shack and one of the world’s most famous restaurateurs, Danny Meyer, invested into Chip City, a new cookie franchise. His investment thesis for other establishments is mainly about 2 things: taste & culture. 

He compares Chip City to when he started Shake Shack (in the sense there were already many competitors). My only beef with that is that Americans eat far more burgers than cookies!

Subway Co-Founder Donates Equity To Charity

Peter Buck died in November ‘21 at age 90. He started the Peter and Carmen Lucia Buck Foundation with his wife, Carmen, in 1999. Thanks to donating his 50% stake in Subway to the philanthropic entity, the foundation now has assets of close to $600 million.

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