When Should I Rent Space?

Updated: Jan 25

Some time ago, I was meeting with a new client to understand his financial priorities. The client had successfully run a small business out of his home for two years, yet was struggling with the financial dynamics of expanding his business and had requested my help in sorting things out. A commercial lease had been signed and he would be moving in the next two weeks. Based on the information provided, we developed a forecast on what his monthly burn rate (cash used up by the business) would be.

It was a disaster! The terms of the lease required the business owner to pay half of the costs of the renovations upfront and included several short-term rent increases within the first 12 months; none of which he’d planned for. His business model didn’t allow for such sharp increases in facilities expenses and he had no cash reserves to weather these increased costs. He was fortunate enough to pull resources from family and we were able to secure financing from a local bank to cover the rest of the shortfall. Unfortunately, he put himself under the unnecessary stress of creating enough revenue to offset the new facility costs and internal and external lending obligations…obligations he never counted on incurring.

How did he get here? He didn’t seek financial counsel before making any commitments. He didn’t count the costs; instead, he rushed into it blindly. So, how do you know when should you rent space? That is a question worthy of great consideration before moving forward. There are two concepts to remember when considering renting space: (1) Don’t Rush It! and (2) Everything is Negotiable! In this article, we will address the first concept. The next article will address the second.

Don’t Rush It

The lure of renting/leasing space is a powerful one, but as the example above demonstrates, it is one that must be dealt with in the light of reality. Now, it’s time to really take a hard look at your business and personal finances to understand whether you are really ready to take on significant costs. Below is a list of questions to carefully consider with the help of a financial advisor:

  1. Is the business growing rapidly or slowly?

  2. Have you released a new product or service that is taking off?

  3. Are you planning to?

  4. How much space do you really need?

  5. What cash reserves do you have in place to cover facility costs?

  6. What if sales remain at the same level? Will cash reserves cover the additional costs?

  7. What’s the average rental cost per square foot in your area?

  8. What about the cost of utilities, new equipment and/or furniture?

  9. What would the financial impact be regarding property & casualty and general liability insurance coverage?

  10. Are there any reasonable alternatives to leasing space?

  11. Are there other significant costs expected outside of this decision?

Taking time to really sort out these questions should provide the clarity to understand what is real and what is not. It should also provide insight to what triggers are necessary before proceeding and in what order those steps should occur when pursuing rented space.

This process really does require the help of both a financial advisor and a good business real estate agent. The financial advisor should provide an objective participant with excellent analytical and forecasting skills. The real estate agent is a key resource for types of available space, rental rates, contract terms and landlord referrals. Keep in mind, though, when working with the real estate agent there will be a very real internal pull to “make a deal happen” before you’ve completed your homework. Push back…this is not a decision to rush.

As you can see, the decision to rent space is a significant step in the life cycle of your business and carries with it an equal measure of risk. Simply put, an ill-planned lease obligation can kill your business. At best, it could set you back financially for a year or two. Take the time to really analyze what is going on with your business and do your best to keep your costs down and obligations to a minimum. That is what successful businesses do every day.

If you have questions or comments on this article, I welcome your feedback.  Comment on our Facebook page.  If you’d like to set up an appointment to talk to us, click on this link.

Just a reminder;  the next article in the Where Do I Start? series addresses the Six Keys to Negotiating Your First Business Lease.

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