How to Find the Best Location for a Franchise
Can you guess the top reason a franchise fails? It’s the same one that is key to the success of a franchise. Location, location, location. Choose the wrong one and no matter what you’re doing right, the business may still fail. Of course, there are other factors that contribute to success such as operations and marketing. However, nothing is as important as site selection. Let’s take a closer look at what you can do to choose the best location for a franchise that will thrive.
Why Does Location Matter So Much?
There are a few different answers to this question. First, a business needs to be located where its target customers are. In other words, demographics are important. Your franchisor will provide the criteria necessary to find optimal demographics for your franchise business.
For example, perhaps you need to look for an area with a population of 100,000 or more people–of whom at least 50 percent are women–and a median household income of more than $75,000.
Next is visibility. Most businesses want to be seen from primary roads. Concurrent with visibility is the consideration of accessibility. Great visibility means little if customers cannot easily access your location.
And don’t forget—access includes traffic patterns as well as the availability of customer parking. Traffic counts need to strike a balance between sufficient and not so much that your customers prefer to go where there is less congestion. Likewise, if parking is a nightmare, will your franchise suffer?
Last but not least, there is the important matter of rent. Obviously, you must be able to afford your monthly rent in order for your franchise to succeed. More specifically, the location you select must balance the potential monthly revenue of your franchise with the cost of rent, which typically equals between 8 and 10 percent of revenue.
How Do I Choose the Best Location for my Franchise?
Now that we’ve covered the reasons why location matters so significantly, let’s consider how to choose a site with these aspects—demographics, visibility and rent—in mind.
Demographics. Once you have the demographics of your target customer, you need to consider whether or not the location you’re considering matches those demographics. A market analysis will likely be necessary and then you may want to study the submarkets, which are smaller and more defined sections of the overall market. For example, Frisco and Prosper are submarkets of the Dallas metro area.
You’ll want to make sure that your target customers are in the submarket you’re considering. Take a look at other businesses in the area. Competition can be a good thing if it indicates what kind of customer is around. One way to find the best address for your franchise is to choose a location where you know your customer is already.
Visibility and Traffic. As you narrow down the possible locations for your franchise, you must consider visibility and traffic as they specifically relate to your franchise. For example, retail stores and restaurants rely on high visibility that encourages impulse buying. On the other hand, a neighborhood fitness center or daycare has an established customer base.
If you’re considering a neighborhood shopping center with a supermarket, will the anchor tenant increase vehicular and foot traffic that could attract customers to your franchise? Conversely, will the anchor’s customers occupy parking spaces in front of your business? All of these factors need careful analysis before you settle on a location.
Rent. The rule of thumb is that you should be able to afford between five and ten percent of your gross sales per square foot for rent. So for example, if your revenue projections are $300 per square foot in sales for your 2,000 square-foot location, then you are anticipating total sales of $600,000 per year.
Based on your sales performance, your rent should range between $30,000 and $60,000 per year in total occupancy cost. Occupancy cost is your total base rent, plus NNN charges, which are taxes, common area maintenance and insurance. In this case, your ideal location would range from $15 to as much as $30 per square foot for rent ($30,000/2000 square feet = $15.00).
Can a Real Estate Broker Help Find the Best Location for a Business?
The short answer to that question is yes! Very often, franchisors will already have a designated broker in place who knows the market and submarkets and has established relationships with landlords in the area. In addition, a broker spends time driving around looking at sites and doing research with reliable online tools such as CoStar and LoopNet.
A good broker, therefore, may know of locations to consider even if a “Space Available” sign is not posted.
Finally, having a broker on your side can be invaluable when it comes time to negotiate the lease. A commercial lease has many different nuances compared to a residential lease. Many of the terms in a commercial lease are negotiable, which could possibly reduce your rent. Thus, working with a knowledgeable commercial real estate broker can save you time and money, leaving you with more of both that you can devote to training and operations in order to successfully launch your new franchise.
The information contained in this article is general in nature and should not be construed as financial, tax or legal advice. As with any financial or legal matter, consult your tax advisor and legal counsel.
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