Most people who try to open their own business don't have much start-up cash.
That makes it challenging to build their property from the ground up, which is why many individuals choose to rent their chosen building. Renting removes the worry of paying for a mortgage each month, but it also presents unique challenges that may be surprising.
Signing a business lease isn't as easy as finding a place to live. There are many more things to consider, especially when it comes to negotiating. No future business owner should sign anything they haven't reviewed and discussed, but many people don't know where to start.
Read on to learn about negotiating the best lease for your restaurant or bar. If you prepare for negotiations, your business will have a better chance to thrive where you plant it. Make notes so you can use these tips to your advantage and sign a lease that gets you one step closer to success.
Determine a Timeline
A lease binds the tenant and landlord for a certain amount of time, but you don't need to take the first lease period a potential landlord offers. Restaurants typically lease a space for five to 10 years, and bars work with one-year leases. Bars present more of a risk for landlords and tenants, which is why those leases are usually much shorter.
After you decide how long you want your lease to be, you'll need to include that timeline in your Letter of Intent (LOI). An LOI is included alongside other legal paperwork and summarizes your entire lease, laying out the essential features. You should decide on the wording of your LOI before you finalize any documentation.
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It's also smart for your LOI to plan for the possible end of your business on that particular property. You should consider how far in advance you'll want to let your landlord know if you'll renew your lease or let it expire. Business owners usually choose to do this within six months to two years in advance of the end of their contract.
Calculate Your Rent
The rent you'll pay each month depends on your profits, so break out a calculator. Food and labor will be the two most significant expenses of restaurants and bars, followed by your lease. Estimate your projected revenue and save 60-70 percent of that number for food and labor.
Whatever's leftover should pay for your tenancy and taxes. Typically, business owners pay five to eight percent in rent from their yearly revenues. After that, you'll need to pay your percentage rent once your profits start soaring. These are the funds you give your landlord after you exceed your sales breakpoint. You'll need to define your gross sales and breakpoint in your LOI so everyone's clear on what that financial threshold looks like.
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While you negotiate your rent, remember what doesn't come out of your pocket. Consider where you'll start your business. There are a few differences between city and rural living that can help out commercial business owners if they know what to look for. You won't need to worry about parking if you live in a rural area with plenty of space, but a city-based business may want to include a parking lot or garage in the rent to make the property more accessible to guests.
Watch for Guarantees
Some banks try to secure a guarantee from your landlord that requires you to pay for your business loan out of your personal accounts if your company isn't profitable. This situation puts your credit rating and personal finances at risk, so many business owners try to opt out. You can attempt to negotiate a higher security deposit with your landlord to cover potential liabilities in place of a guarantee or get a co-signer to verify that your income is valid.
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Landlords who require a personal guarantee may be willing to negotiate. It's in your best interest to consider setting a timeline on this agreement so it expires after a year or two. You could also limit the guarantee so you only need to cover a certain amount of money on things like common area maintenance (CAM) costs.
Research Your Competitors Before Signing
Research your competitors before you sign your lease. Try to find out what nearby restaurants and bars pay in rent or how your landlord treats their current tenants. You'll discover valuable information to frame your perspective on your future lease, which will help you when you start negotiating. Learn as much as you can about commercial lease negotiations and what you can argue for before making anything official.
Ready to renegotiate a lease or expand operations? Homan Taghdiri of Invictus Hospitality is presenting the financially invaluable session “Understanding the Leasing Game & How to Get Ahead” at Nightclub & Bar Show 2020. Sidecar Hospitality’s Andy Chun is presenting “The Essential Guide to Bar Finances,” Stephen Hunt of Hunt Hospitality is hosting “Securing Capital: How to Raise $1M in Less Than 24 Hours,” the owner and CEO of Tahoe Restaurant Group, Ray Villaman, is presenting “Combining Best Practices of Chain & Independent Restaurant Systems & Strategies,” and Terri and Sidney Sokoloff of Specialty Group will share the mistakes operators must avoid during their session “Confessions of a Bar & Restaurant Broker: An Insider’s Guide.” Register today!