Finding Space for Your Franchised Business Before you sign a lease for a commercial location, read these tips from a legal expert to protect yourself and your new business.

"Last year, I bought a franchised business servicingpeople's computers. Up to now, I've been doing business outof my home, but I'm planning to hire a couple of employees and,frankly, my wife is starting to complain about the inventory ofcomputer parts in our basement. I think it's time for me tostart looking for retail space. I'll need about 1,000 squarefeet, according to the franchise people. I'm doing well, butI'm still not 100 percent sure the business will take off andI'm afraid of locking myself into a long-term lease I can'tget out of. Do you have any advice for people in thissituation?"

You bet. First of all, be sure to involve your franchise people.Look to see if your franchise agreement requires them to help youout with "site selection." Most franchises are fairlyfussy about where their franchise units are located. Some will evenfly a representative out to accompany you on your search, so youcan get a better sense of the type of neighborhood and demographicsthe franchise will consider ideal for your location. Manyfranchises also want the right to review the proposed lease andgive you their approval before you sign. Call your franchiseheadquarters, ask for the lease review department, and find outwhat they can do to help you.

Next, find out if your franchise will require you to sign a"collateral assignment" with the landlord. This is ashort document that basically says "if the tenant [that'syou] defaults under the lease, we will give your franchise noticeof the default and give them an opportunity to correct the problembefore we evict you." Many, if not most, franchises requiresuch a document. The form of "collateral assignment"probably appears in your franchise package, but if it's beenmore than one year since you bought your franchise, they'veprobably changed the form, so be sure to ask for a current one.

When speaking to landlords, be sure to tell them you're partof a franchise operation and that the franchise will want certainprovisions included in the lease. Most landlords won't objectto this, as they would much rather have a large nationwide business"on the hook" for their rent and other obligations than asmaller, mom-and-pop operation like yours.

Next, you and your lawyer will need to review the lease, whichwill almost always be on the landlord's standard form. A littlereality check is in order here. While 1,000 square feet may seemlike a lot to you, to a commercial landlord, it's a drop in thebucket (most commercial landlords own several shopping centers oroffice buildings, with millions of square feet available for rent),and they probably won't want to spend a lot of time negotiatingtheir lease document for such a small space. Keep your demands toas few as possible, and make sure they're all "dealpoints"-in other words, if the landlord doesn't show yousome flexibility on each point, you'll walk away from the deal.If your lawyer has 35 changes he or she wants to make to the lease,sit down with them and get their sense of what's trulyimportant.

So what's crucial when negotiating a lease for a franchisedbusiness? Here are some standard lease clauses that can cause somepeculiar problems for franchises:

Use of Premises. Most leases, especially for shoppingcenter and strip mall spaces, require you to describe yourbusiness. This description should be as broad as possible andshould include the phrase "and such other lines of business asare permitted or required to be operated by franchisees of XYZFranchise generally." As your franchise grows, you'll beasked to do different things, and you don't want to have tokeep running back to your landlord for permission to do them.

Noncompete. The shopping center owner should agree that,as long as you're paying rent and otherwise behaving properlyunder the lease, they won't allow a competing business to opena store in the same shopping center. You don't want to wake upone morning and find out three new computer stores have opened inyour mall. If the landlord objects to this, you can suggestlimiting the noncompete to businesses that are "primarilyengaged" in your business. So, for example, if you operate anice cream parlor, the landlord cannot lease to another ice creamparlor but could lease to a Chinese buffet restaurant with a singlesoft ice-cream machine that can be used only by buffet customers.(Hopefully, your ice cream is so good, the Chinese restaurantpatrons will visit your place for dessert anyway.)

Signage. Many franchises have a national sign packagethey want their franchisees to adopt, so that individual franchisedstores look the same no matter where they're located. Thisfranchise package may, however, conflict with the look that theshopping center owner wants all his stores to have. Send photos ofyour space to your franchise, have them prepare a mock-up of whatyour signage will look like, and get the landlord's approval ofthe mock-up before signing the lease.

Cross-Default. If you lose your right to operate as afranchised business, the franchise won't allow you to continueoperating your store in the shopping center, yet you'll stillbe on the hook for rent under the lease. You should be allowed toterminate your lease without penalty in the event you lose yourright to operate as a franchise for any reason, unless thefranchise assumes your obligations under the lease within 30 daysand finds someone else to operate your store.

Assignment/Sublease. Make sure you're permitted toassign and/or sublease your space to (a) your franchise and (b)your successor in the franchised business, in the event you can nolonger continue operating the franchised business and have to handthe keys over to someone else.

Termination. Most commercial landlords won't let youout of your lease if the business isn't doing well. Becausethey don't know how long the property will be vacant if youleave, they'll want you to notify them if you find you can nolonger keep on paying rent, and then continue paying rent whilethey look for another tenant. If they find another tenant, but thetenant wants a lower rent than what you were paying, you'll berequired to pay the difference each month between what the newtenant is paying and what you previously paid. So if there's 30months left on the lease term, the new tenant is paying $90 a monthand you were paying $100 a month, you'll be on the hook for 30times $10, or $300. Some landlords will want you to pay this amountin a lump sum.

The key to getting out of a lease (as well as the key to gettingout of a bad franchise) is to find someone willing and able to takeover your business and pick up where you left off. Regardless ofwhat the lease says, a reasonable landlord will let you off thehook if they like the person you're handing off your businessto and the rent is the same or greater as what you were payingunder your lease.

Cliff Ennico isa syndicated columnist, author and host of the PBS TV seriesMoneyHunt. This column is no substitute for legal, tax orfinancial advice, which can be furnished only by a qualifiedprofessional licensed in your state. Copyright 2004 Clifford R.Ennico. Distributed by Creators Syndicate Inc.