Location. Location. Location. The old adage certainly applies to franchises—from gyms to muffler shops to fast food restaurants. The quality of a location can make or break a business. And, in the aggregate, the quality of locations can make or break a franchise system. The success of a franchise system is closely tied to the strength of its sites. Key considerations in approving new locations include geography, visibility, demographics, accessibility, competition and price. When a franchised business opens at a high quality site, the franchisor wants to ensure that the unit will remain in the franchise system, even after the initial operator is no longer a franchisee. Franchisors not only seek to build general goodwill for their brand, but also seek to build “locational goodwill” at specific sites in specific areas. In order to do so, however, franchisors need to control the real estate where their franchises are located.
It is essential for franchisors to ensure their sites remain in the system when the franchisee’s term expires or terminates. Maintaining control over a large number of real estate sites, though, is a difficult task. Franchisors generally do not have the capital or the opportunity to own their franchised sites. Franchisors are also generally unwilling to directly lease franchise sites, due to high costs, liability risks and other logistical issues. How then can a franchisor control a site when it lacks an ownership or leasehold interest in the real estate?
