It’s not easy to choose the right location for your first store. The bad news? It can be even harder securing that dream spot once you’ve found it!
The right spot can make or break your business and it’s very easy to get too excited about that ‘perfect’ location, especially if it’s your first time round. Negotiating a lease is not a task for the faint of heart but the right terms will give you a huge head-start in your first six months of business and beyond.
Here’s a guide to what you need to consider when negotiating a lease:
When it comes time to negotiate a commercial lease on your first long-term space, you’ll be presented with an initial lease agreement by your prospective landlord (or their broker). There are two key points to bear in mind:
1) The terms will pretty much always favor the landlord
2) This lease is just a jumping off point for discussions. You can almost always negotiate.
As long as you keep these two points in mind, we can go ahead with some key questions you should ask yourself about your lease negotiations.
How Long Will You Be Staying?
What location are you in and how location sensitive are you?
You’re going to want to think about length of time you’ll be in that space. Shorter is sometimes better, as it gives you more flexibility. As a first time business owner, you may not know how well a storefront in your location will do in its first few months or years. You also don’t know how well your entire business in general will do in its beginning stages. Do you want to be stuck in a long term lease, long after you’ve discovered the location just isn’t working for you, or that your business model just isn’t holding up?
On the other hand, if you are an established business opening a second store, you may want to consider a longer-term lease. You already know your business is a success, and you’ve likely had the time and money to do your research on the best locations for your business. Long term leases afford the predictability of costs and space for a prolonged period of time.
In general, the longer the lease the better the negotiating position. At the end of the day, this process is a judgment call based on how location-sensitive your business is. A coffee shop will live and die by its location, but a bathroom supplies store may have a little more wiggle room. If location is everything and you’re sure you’re onto a winner, a longer term lease might be for you.
A great balance here can be signing a short initial lease with an option to renew. For example, you can try to negotiate a one year lease with an option for a three year extension. You’ll generally pay higher rent for the extension period – but again, this is up for negotiation. If you’re a good haggler, you might just be able to wrangle a good compromise between your and your landlord.
Too much rent?
It goes without saying – you need to do your homework on the going rate for rent in your area. Just as if you were buying a house, you’ll want to do your research on the typical rates you can expect when renting a building in your preferred area. Paying rent on the low side may sound great – but it might be an indication that there is something not quite right with the building. Paying rent that’s too high will only hinder your ability to be profitable in your first few years.
Be careful of clauses in your agreement that demand annual rent increases – you’ll want to cap the potential rise here. It may be normal for rent to increase every year, but that doesn’t mean you have to accept the standard rates. A bit of negotiation at this point is where you’ll really see your business costs go down. Not having to pay that extra percentage of rent every year will help to make you more profitable than your neighboring businesses.
You’re responsible for the rent, but what about the other costs associated with occupying a building? You’ll want to confirm who is responsible for paying the following:
Some landlords will pay these costs (and they’ll likely be reflected in your overall commercial rental rates). Knowledge is power here, so get all the facts before you proceed.
Will there need to be work done to the space?
In an ideal world, if you need alterations done to make the space fit your needs, you’ll want to have the landlord provide them at no cost to you. The landlord will undoubtedly want you to pay for it. This kind of discussion should form part of a wider negotiation about length of lease, monthly rental rates, who will pay whom, etc.
If you’re willing to sign a long-term lease, landlords will often be more willing to pay for improvements to the property. They know you’re in for the long-haul, and will want to keep you happy. It’s easier to keep a current tenant than it is to go out and find new a one. This is just one more area where you can negotiate a better deal for yourself.
Will you need to sublet the space?
Ask for the right to sublease or assign your space. That way, if you need to move out, you’ll be able to have another tenant take your space and pay the rent, without having to break the lease.
Even if you’ve fallen in love with the building and just know it’s the perfect space for your business, it’s better to be safe than sorry. You never know what circumstances might come up, especially as a new business. Paying for rent on a building you’re not even occupying is just a waste of money.
There another reason why you want to negotiate this sublease agreement: you may be renting a space that’s bigger than your current needs, in anticipation of growing your business. You may be starting off small – say, a tiny coffee shop with a few seats – but you’ve got big dreams. Maybe you’ll soon grow into a full blown café with couches and pool tables and space for acoustic guitar players strumming along as background music.
You’re still just a small budding business, though. You haven’t reached that level of success yet, and who know how successful you’ll end up being? You don’t want to be paying for all that space when you’re not using it. That’s why these agreements are so important. If you rent enough space to grow into, you can sublease some of the space until you’re ready to use it.
Deciding on your ‘dream’ storefront location is, unfortunately, just the first step. Your ability to negotiate a favorable lease is the all-important second. It’s highly important to get qualified advisors on board – so take some time and find brokers and real-estate specialist lawyers you can trust (ideally through a personal recommendation).
These are only some of the main factors to keep an eye on when negotiating a lease. Do your research and don’t be afraid to stand up for yourself. Remember in the true spirit of shopkeepers throughout time, don’t be afraid to haggle!