Reasons an Individual Franchise Location May Fail

Oct 24, 2019

Address These Factors for a Stable NNN Investment

It may seem unlikely for an individual franchise location to fail, but it can happen. There are several factors that play a significant role, including the quality of the real estate, the creditworthiness of the tenant, and whether it’s an existing or new business. When contemplating a triple-net lease (NNN) lease investment, these factors need to be addressed for the stability of your investment.

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Quality of Real Estate Can Lead to Failure or Success

High-quality real estate is essential to a profitable business and a stable NNN investment. A reputable brand in a location that’s losing population or is not easily accessible can fail. Westwood Net Lease Advisors always recommends looking for an existing, needs-based business, like a dollar store or fast-food restaurant, in a prime location. First-rate locations include high-density areas with good exposure and high traffic rates along major retail arteries or near highway exits. A secondary or less populated market, like a small rural town, can also be a good choice if the business is prominent and easily re-tenantable when the lease expires.

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The Right Tenant Has a Significant Impact on Stability

The combination of the right location plus the right tenant has a significant impact on whether an individual location succeeds or fails. It also influences the strength of your investment. Most NNN properties have a corporate-backed lease guarantee, but it is still imperative to ensure the actual tenant, or franchisee, is creditworthy. It is easy to assume that because a business is a corporate franchise, both the corporation and the tenant have strong credit. However, it is not uncommon to find financial instability at the corporate level, in an existing store, or with an inexperienced franchisee who operates with the bare minimum.

Westwood Net Lease Advisors typically recommend NNN properties with franchisees who own multiple locations, most often 20-25 as a minimum. These owners have the management and business experience and the buying and advertising power to be most efficient, and have the financial strength and experience to ride out any slow periods. Once you choose a location run by a large franchisee with strong financials, you want that franchisee to guarantee the lease, effectively putting the larger, multi-unit organization behind that individual location.

For a stable income-producing investment, look for an existing, needs-based business, like a dollar store or fast-food restaurant, in a prime location with a creditworthy, experienced franchisee.

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A Strong Sales History Means Failure is Less Likely

For a stable, income-producing investment with no surprises, it matters greatly if the store or quick-service restaurant (QSR) you’re considering has strong current sales and projected growth based on history. Even with a well-known start-up, like Dunkin’ Donuts or Taco Bell, success is not guaranteed. A corporate-backed lease ensures you receive rent if the individual location fails, but it’s better for you, as the landlord, to have the reliability of an experienced tenant. A business with a history of profitability and projected earnings based on concrete numbers is less likely to fail than a new store with no history and theoretical sales projections. You can predict cash flow that you can actually see. The only exception to investing in a new property would be to lease to a franchisee with many successful stores that has excellent financials and a history of great success.

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What to Look For & How to Assess the Right Tenant

When searching for your first or next real estate investment, start with premium, “branded” NNN properties with long lease guarantees. These are usually tenants like Dollar General, McDonald’s, and Dunkin’ Donuts, who want control over the entire property for image and consistency. They choose booming communities with population growth, urban renewal living areas, small towns with fewer options, university towns, and rural locations that need their services. These properties typically command higher rents and provide the security of being easily re-tenanted.

Once you’ve found a few options, then evaluate the creditworthiness of each corporation and tenant before any offer is made. Perform a thorough financial assessment, request the history and proof of current store performance, and look at projected earnings. If this sounds like more than you want to do on your own, Westwood Net Lease Advisors performs these assessments and facilitates the entire buying process – from the property search through closing – at no cost to you.

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To Wrap it Up – Minimize Franchise-Failure Risk

To minimize the potential for franchise failure and maximize NNN investment stability, look for a prime location with a creditworthy tenant who is experienced and financially strong. For a stable, income-producing NNN property investment that holds less risk and offers the best outcome for your investment goals, contact Westwood Net Lease Advisors today for your no-obligation, free consultation, 314-997-5227.

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