Investing in a new franchise, or already a franchisee, and not sure whether to lease or buy your business premises? Laurette Pienaar, Nedbank National Franchise Manager, explores the ins and outs….
As with most businesses, traditional retail franchises generally require a commercial or industrial property to trade from. This could be anything from a store in a neighbourhood strip mall to a showroom, office space, warehouse or workshop.
Franchisees are often presented with an opportunity to purchase the building from which they trade. There are many benefits to owning your own property:
- When you rent, you are really contributing towards your landlord’s investment or bond. If you purchase premises, you contribute towards your own investment. This could also potentially offer great returns in the long term, provided that the building is purchased at a reasonable market price, is situated in a good location and is maintained or upgraded regularly, resulting in the value of the property appreciating.
- As a tenant you are at risk with regard to the renewal of your lease at the end of the term (risk of non-renewal), and may also face rental escalations, special levies as well as possible increased amounts for rental guarantees or deposits. These uncertainties can be avoided as a property owner.
- There are tax benefits associated with the purchase of commercial property and you should consult an accountant for more detailed information. Interest payments on the bond are for instance tax-deductible, which will decrease your tax burden.
As a franchisee, regular upgrades and revamps form part of your responsibilities to comply with the brand standards for the franchise. These are generally stipulated in the franchise agreement. You would need to assess the opportunity to determine whether you will have the flexibility to design and rearrange the trading space according to your trading needs, and any improvements you make will result in an appreciation in value over the long term.
You should also consider the possibility of future expansion and increasing of trading space, which is limited when leasing a property.
According to statistics from the 2016 Franchise Association South Africa survey, 70% of franchisees had a good relationship with their landlord due to good communication, having a good understanding with each other and enjoying their support. However, the main reason for poor relationships with landlords relates to poor maintenance of premises, infrequent visits by the landlord and poor communication.
The property market can offer exciting investment opportunities. Research is essential to assess the viability and feasibility of this type of investment for your business.