Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Are Using Co-Working Spaces to Cut Costs
Transcript
- Lucas: So you walk into a pizza franchise at two in the afternoon. The dining room is empty — maybe three people. That space is being paid for by the slice, but it's not earning a dime for the franchisee during those slow hours. Luna: And that's the problem franchisees are starting to solve in a pretty creative way—they're subleasing that idle space to co-working operators. Lucas: Exactly. We're seeing a growing number of franchisees, especially in fast-casual dining and retail fitness, carve out a portion of their leased square footage and rent it to a co-working company. Think of it as real estate arbitrage at the franchise level. Luna: And this isn't just a theory. You've got a specific example? Lucas: Yeah, I talked to a franchisee who runs a pizza chain location in a suburban strip mall. He's got about 1,800 square feet. The dining area takes up maybe 800 of that, and it's only busy from 11:30 to 1:00 and then again from 6:00 to 8:30. The rest of the day, it's dead. Lucas: He partnered with a local co-working operator—not a national brand, just a small flex-space company. They installed a movable partition, and from 9:00 AM to 4:00 PM, Monday through Friday, that dining area becomes a shared workspace. He subleases it for $1,500 a month. His total rent is $4,000. So he's effectively covering over a third of it. Luna: That's $18,000 a year in savings, or extra revenue, depending on how you book it. But what about the mess? Coffee cups, papers, people taking calls while you're trying to prep for lunch rush? Lucas: Right, there are operational wrinkles. In this case, the co-working company handles all the cleaning and furniture. They bring in their own tables and chairs, and they clear out by 4:00 PM. The franchisee doesn't have to lift a finger. But the bigger issue is brand consistency. Luna: I imagine the franchisor has something to say about that. Most franchise agreements restrict how you can use the space. Lucas: That's the bottleneck. Many franchise agreements have what's called a 'continuous operations' clause—you have to keep the location open and operating during certain hours. You can't just shut down the dining room and turn it into an office. But some franchisors are getting flexible. They see that a healthier franchisee is better for the brand. Lucas: I found a fitness franchise—a boutique cycling studio—that subleases its lobby and a small studio room to a yoga instructor who runs her own classes during off-peak hours. The franchisor approved it as long as the yoga instructor isn't competing directly and doesn't use the cycling brand name. Luna: So it's almost like a co-branding arrangement without the branding. But the liability piece—if someone trips over a yoga mat and sues, who's on the hook? Lucas: That's where the sublease agreement and insurance certificates come in. The franchisee's insurance policy typically covers the premises, but if the co-working operator has their own policy and indemnifies the franchisee, that's best practice. In the pizza example, the co-working company carries a $2 million general liability policy naming the franchisee as an additional insured. Luna: Smart. So it's not just about cutting costs—it's about building a new revenue line without adding headcount or inventory. Lucas: Right. And the numbers can be compelling. Let's say a franchisee pays $10,000 a month in rent for 2,500 square feet. If they can sublease 500 square feet for $1,500, that's an 18% reduction in occupancy cost. Over a 10-year lease, that's $180,000. Luna: But not every franchise is suited for this. A QSR with a drive-through probably has a different layout. And some landlords include exclusivity clauses that prevent subleasing to certain uses. Lucas: Yeah, the landlord approval is another hurdle. Many retail leases require landlord consent for any sublease, and they might want a cut of the rent or the right to approve the subtenant. But in a soft retail market, landlords are often willing because it keeps the primary tenant solvent. Luna: So what's the takeaway for a franchisee listening right now? Step one: look at your lease and your franchise agreement for any restrictions. Step two: figure out which square footage is truly idle. Step three: find a co-working operator—maybe a local one—who's interested in a short-term sublease. Lucas: And don't forget to run the math on the fit-out costs. If you need to add a partition, separate electrical meters, or improve wi-fi, those upfront costs eat into the savings. But in many cases, the co-working operator covers those because it's their space during those hours. Luna: I wonder if we'll start seeing franchise-specific co-working concepts. Like, a brand that designs its stores with a flexible partition from day one to accommodate a daytime co-working tenant. Lucas: That's actually happening. A few newer fast-casual prototypes include a 'flex room' that can be used for private dining, meetings, or subleased to a co-working operator. It's built into the franchise disclosure document as an optional feature. Lucas: And speaking of things that make this possible—you know, this kind of deep-dive into franchise strategy is exactly what listeners tell us they value most. A small group of them actually chips in monthly to keep these conversations ad-free and independent. Luna: Yeah, it's a pretty lean operation. If you've gotten something out of episodes like this, supporting the show at buy me a coffee dot com slash fexingo helps us keep digging into these practical angles. Lucas: Totally. And we really mean it—no pressure, just if it's made a difference in how you think about your franchise business. Now, back to that flex room idea: I think we'll see more franchisors building that into their standard prototypes over the next few years. Luna: It makes sense from a unit economics perspective. The franchisee's breakeven rent goes down, which lowers the risk profile. And the franchisor gets a more stable network. Lucas: Exactly. And there's a secondary benefit: the co-working members become potential customers. In the pizza example, the co-working operator puts the franchise's menu in the space, and members order lunch. The franchisee saw a 10% increase in lunch sales from that arrangement. Luna: So it's not just a cost play—it's a marketing channel. The franchisee is renting out space to people who then become customers. That's a double win. Lucas: Right. And it's not limited to food. A hair salon franchise could sublease a chair to a makeup artist during slow hours. A dry cleaner could let a tailor use a corner for alterations. The principle is the same: find the idle asset—space, equipment, or even staff—and monetize it. Luna: But there's a risk of brand dilution. If the co-working crowd is loud or messy during the overlap period, it could hurt the customer experience. Lucas: That's why timing and separation are crucial. The most successful examples have a hard wall—physical or temporal. Either the co-working area is completely separate, or the hours don't overlap at all. If it's done well, the customer barely notices. Luna: So what's the biggest mistake franchisees make when trying this? Lucas: Not getting franchisor approval in writing. I've heard of franchisees who started subleasing without telling corporate, and they got a cease and desist. It's better to bring the idea to the franchisor as a pilot, with data on idle space and a proposed sublease agreement. Some franchisors are even creating guidelines for this. Lucas: Another mistake: underestimating the cost of utilities. If you're subleasing 20% of your space, the co-working tenant should pay a proportional share of electricity, water, and internet. That's usually easy to meter, but you have to build it into the sublease. Luna: And the co-working operator's hours—if they want 24/7 access but your franchise closes at 10 PM, you need to figure out security and liability. Lucas: Exactly. That's where a good sublease lawyer comes in. It's not a handshake deal. You want a written agreement that covers hours, insurance, cleaning, utilities, and termination rights. If the co-working operator goes under, you don't want to be stuck with their furniture. Luna: So it's a niche strategy, but for the right franchisee with the right layout and a cooperative franchisor, it can be a real profit center. Lucas: Yeah, I think we'll see more of it as retail real estate continues to evolve. Franchisees are getting smarter about their biggest fixed cost—rent—and finding ways to turn it into a variable cost. Subleasing to co-working is just one tool in that toolkit. Luna: And it beats the alternative of just letting that space sit empty. Lucas: Absolutely. Next time you're in a fast-casual place during the afternoon lull, look around. That empty dining room might just be someone else's office tomorrow.