In other buildout scenarios, the franchisor provides only a design and layout for the location, leaving the franchisee responsible to act as a general contractor, selecting professionals to build out the location. In most of these cases, however, the franchisor’s consent is required in the selection of subcontractors and the construction must be completed in accordance with the franchisor’s standards and specifications.
By being directly responsible for selecting contractors and overseeing the construction project, the franchisee has more ‘skin in the game,’ with full responsibility for any cost savings and/or overruns on the project. This being the case, the franchisee is less likely to blame any overruns on the franchisor for failing to meet a budget.
The franchisor may provide very specific plans for the specific premises or, alternatively, general sample plans which will need to be adapted for the chosen location. Either way, the franchisor will retain a right to inspect the location both during construction and after completion.
Reasons for different approaches
Beyond those already cited, there are numerous other reasons for these different approaches in the franchising sector.
The franchisor might lease the location directly, for example, and then sublet it to the franchisee. In this case, the franchisor is more likely to want full control over the development of the location.
Another factor that can come into play is how extensive the development or renovations will need to be. Some franchise locations are free-standing, as opposed to multi-tenant buildings. A free-standing location often requires a greater degree of building design and development, so the franchisor may want a greater degree of control over those processes. With relatively smaller buildouts, on the other hand, less work may be needed and the franchisor is more willing to allow the franchisee to undertake it directly.
Larger franchisors, especially, often have design teams and construction crews at their disposal, who can cost-effectively and efficiently undertake all phases of location development work. This may not be an option, however, when a franchise system expands to a new territory that is not in close proximity to previously built locations. The benefits of an experienced crew need to be weighed against the costs of transporting that crew to develop the new franchise.
The consistency of location quality and appearance is fundamentally important to franchisors, so they are often nervous about letting a new crew undertake construction without a proven track record of past performance. Whichever approach the franchisor and/or franchisee take with regard to design and construction, there will be a strong focus on standardization and uniformity.
It is not unusual, therefore, to find quite a lot of detail in franchise agreements regarding the process of development, construction and improvement of locations. Before signing the agreement, after all, you will need to know how your franchise will achieve the same look and feel that the public has come to expect from other locations, which will make it an instantly recognizable ambassador for the brand upon opening for business.
Peter Snell is a partner and franchise lawyer in the Vancouver offices of Gowling Lafleur Henderson LLP. He can be contacted via e-mail at email@example.com.