Leasehold improvements are fixtures or improvements that are attached to the retail or commercial space and installed by the franchisee when setting up a new location. Upon expiration of the lease these improvements remain with the space and become the property of the landlord. Examples of such improvements might be walls, doors, cabinets, light fixtures, floor coverings and even machinery and equipment if it is bolted down to the floor. These improvements are required to make the space work for the needs of the business.
As a franchisee you are typically responsible for all the costs associated with constructing the space and leasehold improvements and ensuring that they are done according to the franchisors specifications and standards. The franchisor is responsible for the integrity of the brand and will usually provide standard prototype plans and drawings. An architect would then be required to create new plans that are specific to your space and that comply with local bylaws and city requirements while still meeting the franchisors standards. Some franchisors have design services as part of the franchise support or as an added fee. The franchisor will require that plans be approved by them before construction starts.
Depending upon condition of the space and the business model, the required leasehold improvements can be extensive. If you are dealing with a brand new building with a “shell” space with bare cement walls and floor and are building a restaurant, you will require plumbing, HVAC, heating and electrical in addition to the typical improvements. Costs can range from $100,000 to well in excess of $700,000, depending upon the type of business, size and condition of the space. These costs can sometimes be reduced by the landlord providing a leasehold improvement allowance, or a lump sum payment upon completion of the space
In some cases you may acquire a space that has pre-existing leasehold improvements. This could reduce the costs, but not necessarily. In some cases, minimal improvements can be salvaged and then you are paying for demolition of the old as well as new construction to bring the space to the franchisors specifications. In some cases, there are costs associated with bringing the old improvements up to standard building codes, such as extra washrooms, kitchen electrical, gas, plumbing and ventilation. Don’t assume there are savings by dealing with existing improvements. Work with the franchisor to have a thorough assessment done.
Depending upon the franchise, you may be required to build out the location through the hiring of a general contractor. Ask the franchisor to recommend a general contractor who has built out stores for the franchise in the past. You want to select someone who is reputable and can get the job done on time, on budget and within the franchisor’s specifications. Check references and visit locations that this contractor has built in the past.
Whether it is through a general contractor or the franchisor, be sure to get specific quotes as to what the build out of the location will cost and get it in writing. There will often be unforeseen costs and delays. Address before hand what happens if costs exceed say a 10% variance. You may be able to negotiate where such overruns are the general contractor’s responsibility or that there is some compensation to you for delays.
In reviewing the costs for a store build out a franchisee will often comment that the costs seem high. Avoid the desire to negotiate the improvements and reduce costs. Quality construction is expensive but typically necessary. You will always be able to find a cheaper piece of equipment or specification of carpet, but usually at the expense of quality or warranty service. The cheaper kitchen equipment may have a tendency to break down. How much will this cost you in lost revenues when your restaurant is closed for equipment repairs? How does it affect your business when the carpet is frayed and worn in high traffic areas after only a year, and in need of replacement?
The franchisor throughout the entire process will be overseeing the plans and construction to ensure the finished location conforms to the franchise concept specifications. The franchisor will typically make regular site inspections during construction to ensure that the brand is consistent and that the location has the same look and feel as all the locations of the brand. You may be able to provide input but it will be the franchisor that will make the final decisions. Recognize that they have the experience and that often there is a strategy behind the design. You may feel that the kitchen is too small and want to make it bigger, yet the franchisor recognizes, through experience, that the smaller well designed kitchen creates greater work efficiencies and permits more front of house space, thus more tables and greater revenues. If you object and fail to comply with the standards you may risk being in breach of your franchise agreement and incur costs to redo certain parts of the build out in order to conform to franchise standards.
Leasehold improvements and store build outs can be overwhelming. There are a lot of details and it is a large investment. Make sure that you select the right contractor and have the build out monitored closely by the franchisor. Ask questions so that you understand the decisions being made but rely on the experience of the franchisor. That is part of the value of a franchise.