With the lease-management (or free-management) contract, the owner of a business (lessor) grants another trader (tenant-manager, often a legal person) the right to freely exploit this business. On payment of a fee, of course, but at his own risk.
This type of contract differs from the franchise, where the candidate buys the goodwill to become the owner. It should not be confused either with salaried management, which is subject to labor law. “Leasing-management does not come under the franchise, but often supplements it, notes Martin Le Péchon, specialist lawyer and author of the Practical Guide to Franchising (Dunod, 2020). “In some networks, the point of sale is put in lease-management and, at the same time, the brand has the candidate sign a franchise contract. This facilitates the access of candidates to the goodwill over which the franchisor retains control.”
The contract for strategic locations
For each party, this approach has advantages. On the candidate side, it is the possibility of easier access to independence, with a much lower starting bet and an already established clientele since the brand must have exploited the fund it rents before signing the contract. For the network, it is the possibility of retaining control of its commercial locations. If this contract is particularly widespread in the fast food industry, it is because the brands in the sector often occupy strategic sites. “These locations are very expensive and more difficult to make profitable, explains Martin Le Péchon. Via rental-management, the networks therefore seek to keep control of these very well-placed restaurants.”
But this type of contract also has drawbacks, especially for franchisees. You must first take into account the financial risk (see box), to which is added that of not being able to enhance your fund by negotiating your departure. This is why certain clauses provide for a purchase option at the end of the contract with a discount on the sale price, so as not to give the franchisee the feeling of working on empty and of being exhausted. “A tipping point must be provided in the contract, advises Martin Le Péchon, for example a turnover target or a minimum duration. They will allow the tenant-manager to position himself to acquire the fund.”
Finally, we must reckon with another practice, common in fast food networks, whose points of sale are often very expensive: the transfer, by the brand, of the capital of the company of the tenant-manager. “This allows the latter to recover significant sums in this way”, specifies the lawyer. For the franchisor, providing these guarantees amounts to ensuring the motivation of the lessee-manager. And its productivity.
Fees too high?
“You must provide in the contract a turnover target or a minimum duration”, advises Martin Le Péchon, a lawyer specializing in franchising.
© / PDS
For franchisees, lease-management has the immense advantage of offering significantly lower entry prices, hence its appeal. But beware: you must not forget to pay attention to the multiple royalties that dot the contract.
In fact, there are two types: on the one hand, the rent of the fund; on the other, variable contractual sums of money. These bear different names depending on the brand: franchise fee, communication fee, computer fee or group purchase fee. In some networks, they are sometimes grouped into one.
On average, the overall fee fluctuates between 5 and 7% of turnover. With an obvious danger for the franchisee. “By being overwhelmed by the financial costs, he simply risks finding himself asphyxiated by his franchisor”, warns lawyer Martin Le Péchon. A warning that also applies to signs. “Those who demand too much money don’t last.”
An article from the Franchise special issue of L’Express. On sale since March 16.