Outsourcing Real Estate – A Path to Expansion
Outsourcing real estate services can save both money and time and result in successful expansion.
As franchisors work to best tackle the real estate needs of their companies, many discover the benefits of partnering with a strong, outsourced real estate solutions-provider. Securing the right site and negotiating competitive lease or purchase terms significantly affects the revenue and profitability of each unit. Further, when a franchisee signs to open new units, his first major step is to go through the real estate process. At this stage in the relationship, it is very important to successfully manage the real estate process so that this relationship has a strong and healthy beginning. Outsourcing real estate services provides benefits to both the franchisee and franchisor which can save money and time, and result in successful expansion.
Establishing, maintaining and growing an internal real estate department is expensive. As indicated in the nearby table, a basic real estate department typically costs $325,000 to $515,000 per year to operate. These are fixed costs that are incurred each month regardless of the amount of activity the real estate department is managing. By outsourcing real estate needs, franchisors can reduce significantly or eliminate completely these costs from their corporate overhead. Plus, costs associated with real estate can be transformed from fixed monthly costs into variable costs tied to each new location.
Many leading franchise consultants encourage franchisors to consider outsourcing real estate. “Outsourcing enables franchisors to provide strong support to their franchisees while keeping their corporate overhead costs in check,” according to Mark Siebert, CEO of the iFranchise Group. “For franchisors without a real estate department, outsourcing real estate is a cost-effective way to address an important need and improve franchisee performance.”
Franchisors with in-house real estate departments can benefit from partnering with an outsourced company to bolster their capabilities. Siebert points out that “these larger companies can leverage their internal resources and add bandwidth, experience and relationships without adding to their corporate personnel or payroll.”
Scalability and Bandwidth
Outsourcing has a number of advantages compared to building an internal real estate department. Due to the variability of the franchise sales cycle and the timing of development by multi-unit franchisees, it is difficult to predict the exact number and timing of new units that will be opened each year. For this reason, it is ideal to have scalability: the flexibility to scale the size of your team throughout the year to coincide with the actual flow of new units. This can be difficult to manage when an internal real estate team is in place, as it is not only difficult and time-consuming to hire and train new personnel when understaffed, but even harder to carry the cost of underutilized employees when overstaffed.
Another typical challenge is that the real estate process requires a significant amount of time and attention. Having the people responsible for getting franchisees into the system and opening their units, as well as managing the real estate process, creates bandwidth challenges. These people are unable to sell the expected number of franchises or be as effective in their training and support roles if a large amount of their time and energy is devoted to guiding franchisees through the real estate process. An outsourced real estate partner eliminates issues of staffing, provides scalability and increases bandwidth for the franchisor’s internal team. With a rapid response time, an outsourced partner can efficiently adjust to fit the changing needs of a franchisor.
Results Through Experience and Relationships
The utilization of an outsourced retail real estate team of experts to manage the site selection process and lease or purchase negotiations for your franchisees helps to ensure that they open in locations that are positioned for success. A top-quality real estate partner will draw upon his experience to help each client strategize, based on the core success factors of the concept, and establish detailed procedures to make sure nothing is overlooked during the process. Seasoned real estate professionals will also leverage key relationships with property owners and brokers to identify off-market site opportunities for franchisees and work to secure aggressive lease or purchase negotiations.
It may be tempting to work with a real estate professional who has helped in your local market and many real estate brokers claim to provide national coverage because they are affiliated with a national company or network organization, however, this situation can pose a number of problems. Typically, the local broker will simply hand off projects to other brokers across the country without a system in place to oversee and manage the project or ensure consistency and quality of service. It is also common for local brokers to give franchisees’ projects to whomever their affiliate connection is in other cities, rather than taking the time to find the best-in-class local broker in that market who has the experience and relationships needed for your concept.
To get the best results, choose a company that specializes in providing national real estate management and outsourced solutions.
Choosing the Right Real Estate Provider
When setting up a partnership with an outsourced real estate provider, franchisors will typically consult with their attorney regarding any issues related to offering such services to franchisees. According to Lane Fisher, CFE, partner of FisherZucker LLC, a franchise-focused law firm, outsourcing real estate may be a very effective strategy for a growing brand.
“Most franchise agreements will put the obligation of securing a site onto the franchisee, but the franchisor still has the responsibility of accepting the site,” Fisher said. “As an alternative to hiring experienced real estate professionals to work in-house, many fast-moving brands are turning to outsourced real estate professionals. These firms provide a valuable service to franchisees because they understand both the local real estate market and the underlying brand. The insight and market intelligence that these partners can provide helps franchisees and franchisors to make strong decisions.”
As you work to select the right outsourced real estate solutions partner for your company, there are some key items that you should discuss during the selection process. It’s best to work with a firm that has an in-depth knowledge of franchising. If your potential vendor cannot explain to you the relevance of things such as an Item 19, a financial performance representation, an area of protection or a franchisor lease rider, then he is not the right partner.
In addition to the legal aspects of franchising, you will benefit greatly by selecting a partner that understands the psychological nuances of working with franchisees. Ask the potential vendor to explain his approach in working with a first-time, single-unit franchisee, a multi-unit franchisee and an area developer. Franchisors know the different needs and challenges that each of these types of franchisees represent and so should a real estate partner.
When making an outsourcing choice for retail real estate, it is best to select a partner with a strong understanding of franchising who has the expertise to help you and your franchisees execute a real estate strategy rooted in the core success factors of your concept. Consider how cost, scale and bandwidth best allow you to proceed and look for a proven track record of successfully managed expansion utilizing experience and relationships so that you will get strong results.
Phil Baugh is the managing director of the National Real Estate Solutions division of Baum Realty Group, a leading real estate company that has helped many franchisors successfully expand into hundreds of markets across North America. Find him at fransocial.franchise.org.