Dual Agency Dilemma: How Conflicts of Interest Can Undermine Franchise Success

One of the core principles of successful leadership is putting the interests of others first. As Simon Sinek wisely stated, "Leadership is not about being in charge. Leadership is about taking care of those in your charge." This principle is especially crucial for franchisors and their franchisees, who face unique challenges in real estate. One critical decision that can significantly undermine a franchisee's success is the choice of a commercial real estate broker. Many franchisors partner with large, full-service brokerages representing tenants and landlords. However, this approach can put franchisees at a financial disadvantage. A more effective strategy is for franchises to utilize tenant-only brokerages for their franchisees' real estate needs.

The Conflict of Interest in Dual Representation

When a brokerage represents both tenants and landlords, an inherent conflict of interest arises. These firms may prioritize maintaining relationships with property owners over securing the best possible terms for tenants. This conflict becomes especially problematic for franchisees, who often need more real estate expertise to navigate complex lease negotiations on their own.

Advantages of Tenant-Only Brokerages

Tenant-only brokerages offer several key advantages for franchisees:- Undivided loyalty: These brokers work exclusively for tenants, ensuring their sole focus is securing the franchisee's best possible terms.- Market knowledge: Tenant-only brokers often have a deeper understanding of market rates and concessions, as they're constantly negotiating on behalf of tenants.- Stronger negotiating position: Without ties to landlords, these brokers can negotiate more aggressively and creatively to benefit the franchisee.- Transparency: There's no risk of hidden agendas or divided loyalties when working with a tenant-only brokerage.

Financial Implications for Franchisees

The choice of brokerage can have significant financial ramifications for franchisees. Brokers representing landlords may be incentivized to steer tenants toward properties where they can earn higher commissions or maintain landlord relationships. This can result in:

• Higher rental rates

• Less favorable lease terms

• Reduced tenant improvement allowances

• Overlooked opportunities in the market

By contrast, tenant-only brokers are motivated to secure the best possible deal for the franchisee, potentially saving thousands of dollars over the life of a lease.

Case Study: The Pitfalls of Dual Representation

To illustrate the risks of using a landlord-focused brokerage, consider the case of a national franchise group that recently completed a deal in Erie, Colorado. The franchisor partnered with a large, full-service brokerage in Colorado to handle real estate for its franchisees. In this instance, the franchisee was looking to open a new location in one of the fastest-growing markets in Colorado. The brokerage, which also represented dozens of landlords in the area, quickly steered the franchisee toward a property in their own listing portfolio. The franchisee, trusting the brokerage's recommendation, signed a lease for the space. While the franchisee may have received a market deal, the broker on the deal had a fiduciary responsibility to the landlord and received a double commission. This arrangement incentivized the broker to prioritize their and the landlord’s financial gain over the franchisee's best interests. Had the franchisor partnered with a tenant-only brokerage, the outcome likely would have been more favorable to the franchisee. A tenant-focused broker would have:

• Conducted a thorough market analysis to identify truly optimal locations

• Negotiated more aggressively on rental rates and tenant improvements

• Avoided the conflict of interest inherent in representing both sides of the transaction

Implementing a Tenant-Only Strategy

For franchisors looking to support their franchisees better, transitioning to a tenant-only brokerage model can be highly beneficial. Here are some steps to consider:

1. Evaluate current real estate partnerships and identify potential conflicts of interest.

2. Research reputable tenant-only brokerages with experience in your industry.

3. Develop clear guidelines for franchisees on working with approved tenant-only brokers.

4. Provide education to franchisees on the importance of independent representation in real estate transactions.

5. Monitor and analyze real estate outcomes to demonstrate the value of the tenant-only approach.

By prioritizing tenant-only brokerages, franchisors can ensure their franchisees are well-positioned for success in an increasingly competitive real estate market. This approach protects franchisees financially and aligns with the franchise's overall goal of supporting and empowering its network of franchisees. By "taking care" of the franchisees first, franchisors can build stronger, more sustainable businesses that thrive on mutual trust and success.