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Franchise Unit Location: Buy or Lease?

Here is the question that your answer can make or break your entrepreneurial career: To buy or to lease business premise.

Leased property

Leased property

Many people misunderstood McDonald’s business model. Many thought that McDonald’s is successful because it makes the best burgers.

Not entirely true (to me, Burger King’s burgers are the best of all – LOL. McDonald’s? Theirs are simply… um… bland.)

Many people can claim that they make better burgers than McDonald’s. They can be successful with their superior burger recipes. Unfortunately, most of them are missing one major key ‘ingredient’ – An ‘ingredient’ that makes McDonald’s not only successful as a franchise, but as a business empire, worldwide – no matter how some people hate McDonald’s unhealthy food products.

The key to McDonald’s success is the founder’s vision.

Ray Kroc, the father of McDonald’s, said that he is not in a burger or food and beverages business; he said that he is in a real estate business. In essence, he was saying that he invests in real estates and simply put some burger restaurants on them.

I don’t know whether he is entirely serious about what he said, but I get the essence of his messages very well… and in the hard way.

Should you buy or lease a business location?

Looking at McDonald’s locations worldwide, the franchise units are occupying top locations – No wonder McDonald’s are so successful as a company.

Learning from the McDonald’s case, here’s a question to ponder: Should you buy or lease a premise for your franchise unit? If you already own a property, then the question is no longer relevant. But for the rest of us, the answer will determine the future of our franchise units.

If you asked me, my answer would be: Buy the location, and build a business on it.

When I plunged into franchising, I was inspired by Ray Kroc. However, my limited resources are not allowing me to invest in a property, at that time. So, I thought that renting a space is the most viable option.

What seems logical to many people (including me), was fatal to my business… and my entrepreneurial career. My franchise units’ profit is drained by the leases – and that’s just the beginning.

To cut long story short, things did go bad for my franchise units, and I had to let my franchise units go. What was left for me is… debt.

The thing is, creating asset is very important. Your franchise unit is an asset, but the location of it is, too, an asset. Buying a premise is a great business strategy, because when things go bad I still own the location (I can always set up a new business upon it later on, or just lease the space to other businesses.)

Why I advocate buying a location, instead of leasing it: A little math

One major drawback of buying a property, instead of leasing it is large initial investment.

However, come to think of it, you can always use mortgage facilities to finance the property purchase. Moreover, you can always speed up your mortgage payments using the profit of your franchise unit, instead of using the profits to pay for lease.

While some business owners’ strategy is to establish a successful business, and let a part of the cash flow to acquire the location, this is not a one-size-fits-all solution. To some others, buying a property to build a business upon is a more desired strategy.

Here’s a simple, common sense, math to illustrate why you should buy, not lease:

Annual lease value is generally 5% of the value of the property. In other words, you need to pay the lease for 20 years to reach 100% of the property value (5% x 20 = 100%.)

If you can secure a mortgage with at least 20 years tenure, wouldn’t it make a better sense if you buy the property, instead of lease it?

Sure, a $100,000 investment to buy a franchise could cost you $200,000 to $250,000, even more in total if you want to acquire the location, depending highly on the location and value of the property you’re after. But considering you can acquire an asset with the bank’s money, paying for the principal, interest, taxes and interest (PITI) of the mortgage is better than paying for the lease, don’t you think?

Leases don’t get you an asset. Property ownership through mortgages can.

Ivan Widjaya
On buying or leasing a business premise
Image by Daquella manera.

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