The Franchise Owner's most trusted news source


Log In / Register | Apr 19, 2014

A Good Business in a Bad Location Will Be a Bad Business

The number one reason for business failure or negative performance is a poor location. A poor location ultimately results from poor site selection. Consider that identical stores from the same chain or even similar stores within the same industry will vary as much as 200% in volume of sales annually; the primary difference would be location. Other factors include store size, marketing budgets, management and so on, but these are secondary to the importance of location.

Essentially there are three types of locations: Profitable, Break-even and Go-broke:

  • A truly profitable location will make money and the business will appreciate in value.
  • A break-even location will pay the owner a small salary and pay the rent but not much more.
  • The go-broke location demands the owner continually pour more money in to survive. The example that comes to mind lasted less than three months from opening to closing for one unfortunate tenant. Despite my warnings that this was a go-broke location, the business owners spent over $80,000 into their store setup and, by the second month of operation. couldn’t pay their rent. Usually a go-broke location will not only steal your capital but put you into personal bankruptcy, after you’ve maxxed out your credit and second-mortgaged your home.   

If you thought site selection was all about Location – Location – Location you’re right … intellectually. However, when tenants are involved in the site selection process, good old common sense often goes out the window. Consider for a moment that site selection is not a science; it’s an art, part research, part luck, part timing and many other ingredients combined. For example, is the best time to do site selection is before or after you commit yourself to opening a business?  If it sounds too obvious don’t be fooled; most tenants do their site selection after – not before – committing themselves to a business opportunity.  One such case involved a retailer who began receiving seasonal spring inventory for a new store but he hadn’t finished picking the location for the store or negotiating the terms yet. Consequently, this entrepreneur compromised on the location and on the best deal he could have made … just to finally get open.

In my book, Negotiate Your Commercial Lease, I’ve dedicated an entire chapter to site selection. Here are some topical tips from the expert:

Allow enough time so that you’re not making decisions under pressure. Typically, for a new business you should start the site selection process six months in advance of when you wish to open. If you find a really hot location, usually the landlord will hold it for you for a few months. However, if the process takes longer you may need several months to finalize the Offer to Lease, review the formal lease documents and build out the store.

Don’t  let a realtor/agent (who represents landlords) show you space all over town. In this industry, there are agents who list the property and other agents who lease the property; however, there is only one commission paid by the landlord. When listing agents both list and lease the property, they will gain as much commission as possible. The commission pie, however, is only so big. When an outside agent introduces you as a potential tenant, the listing agent faces accepting less of the landlord’s commission … therefore, he/she becomes considerably less motivated to do the deal with you preferring to find his/her own tenant to lease the space – thereby earning all of the commission.

Additionally, doing this will also undermine your negotiating power since the real estate agent will know how you feel about every location. A realtor may be helpful in pointing out a location you were unaware of but remember he/she is working for the landlord who will ultimately pay a commission. While an agent’s advice may sound sincere, it may be sincerely wrong.

Make your leasing inquiry by calling the For Lease number on the property or on the leasing agent’s sign, after you have finished driving around doing site selection. This way you will meet and negotiate with, or through, the listing agent directly.  View prospective sites from worst to best. You will become better at handling yourself and by the time you get to the property you like the most you ask better questions and gain more control of the leasing process.

Don’t telegraph your intentions by giving buying signals. I recommend that you have the leasing representative fax or send you some preliminary information in advance before you agree to view the space. During the viewing, stifle the urge to think out loud; subtle comments to a partner or spouse overheard by the landlord’s leasing representative or property manager can work against you. For example, “This could be my office” or “We’ll need to change the carpeting …” will indicate your interest in the property and will work against you when it comes to negotiating the terms. If you’re asked how much you’ve budgeted for rent payments, be vague. Not every question asked deserves an answer, not yet anyway.

Never make the first Offer to Lease. The landlord’s leasing representative, upon your request, will prepare a lease proposal or an Offer to Lease containing suggested Terms and Conditions for your tenancy. While this is not a site selection tip per se, it is an integral part of the site selection process. When you receive an Offer to Lease first, you will then be nicely positioned to counteroffer or negotiate the proposal.

Don’t  negotiate on only one location at a time. You can - and should - create competition for your tenancy; you can do so by obtaining lease proposals on several different properties simultaneously. Avoid the tendency to negotiate on one deal at a time. Negotiating on multiple locations at the same time may be the single most effective tool you have for creating the best deal. While one landlord may offer you three months of free rent, the next may offer four months and so on. By playing one landlord’s lease proposal against another, you will be negotiating from a position of strength.

Do your homework before you start. Get out a map and mark the boundaries of where you’re willing to open your business. Use the Yellow Pages to pinpoint locations of competitors and complimentary tenants that might enhance your business. Talk with existing tenants in buildings you’ve selected as prospective sites doing this can provide a wealth of information. Remember that good preparation is an excellent substitute for novice negotiating skills.

If you find yourself trying to decide between a better location at a higher rent versus a lesser location for a lower rent my advice is go for the better location. When I’m consulting to tenants and doing site selection my job isn’t to find the cheapest location – it’s to select a site that will help the tenant maximize sales. Remember that you want to be profitable – not break-even. It is better to have negotiated poor lease terms on a good location than a great deal on the wrong location.

When doing site selection, consider that landlords sometimes prefer to lease their worst space first and save the best for last. Usually, the individual unit or location you lease within a shopping centre or strip mall is more important than the mall itself … or at least equally important. Lease rates can vary two to three times within the same building depending on the following: desirability and demand for a particular premises - the time of year – visibility – walk-by or drive-by traffic flow – accessibility – frontage – the shape of the space – the quality of neighboring tenants – anchor tenants – and whether or not you will be operating as an independent or a national chain name. While you don’t always get what you pay for in leasing commercial space, you don’t normally get more than you pay for either.

If you are aware of a great building without vacancies, don’t despair. By contacting the property manager or leasing representative you may discover that another tenant’s lease is about to expire; the tenant may therefore close out or move. Perhaps a tenant will be leasing month-to-month while the landlord hopes to find a permanent tenant like you. Don’t rule out the hot properties just because there are no vacancies. Every building has tenant turnover sooner or later. Frequently when my client has wanted to open in a less desirable location (because nothing else is available) I encourage him/her to wait. We stay in contact with the landlord and invariably a better location usually becomes available within a few months. Considering that you will be leasing that location for a very long time it’s worth the wait.

For some business operations location is absolutely critical and for others it may be less important. If your business is not location-dependent then you should have the proverbial upper hand in your negotiations. This applies more so to office or industrial type tenants.

If you already own a business but are considering relocating upon expiry of your current lease, you should start the site selection process at least nine months in advance or more. The theory is that if you can’t get a good lease renewal you need enough time to select alternative sites and negotiate a new lease elsewhere. Good luck with your site selection.

This is the first article in a series of columns on Leasing. In forthcoming write-ups, I will discuss learning from other tenant’s mistakes, increasing your bargaining power and choosing the proper lease term (or length). Please send any topic suggestions, stories and comments to Rick Lauber in our Marketing Department at 1-800-738-9202.

--

Dale Willerton is Founder of The Lease Coach, a network of Certified Commercial Lease Consultants who work exclusively for tenants and franchisees across the US and Canada. For more information, e-mail [email protected], call 1 (800) 738-9202 or visit us at www.TheLeaseCoach.com.

Your rating: None Average: 5 (3 votes)