How do you negotiate for a Coffee shop location?

How do you evaluate a potential coffee shop location?
July 10, 2010
Coffee Cups
September 4, 2010

Well firstly we knew nothing about commercial leases before we started looking and we kind of just picked it up along the way. You could use a chartered surveyor to find the property for you but where is the fun in that, not to mention they cost lots. First thing to note is you want a leased property, very rarely would it make sense to buy a commercial property. You will see properties advertised with things like a 10 year lease with a 5 year break, this means you are agreeing to rent the property for 10 years. The break clause allows you to get out of the contract at that point, so with the example above you would have to have the property for a minimum of 5 years before you could end the contract.

For the agent and landlords they want a lease for as long as possible and you want a short lease, particularly for your first location. This is all about risk management for you and your business so you MUST negotiate, if your not good at it find someone who is.

Calculate your risk

Your risk is the total cost of the lease up until the breakpoint, so lets say the rent is £20,000 per year and its a 10 year lease with a 5 year break. Your risk is 5 x £20,000 which equals a total risk of £100,000. So as soon as you sign that contract for the lease you will have to pay £20,000 each year even if the business is no longer trading. Why you say, surely if the business goes under I no longer have to pay. Well the reality is that if you are a first time leaseholder then the landlord will probably insist on you signing personal guarantees for the lease. This means you are personally liable for paying the rent if the business is unable to pay.

There are ways out of a lease, you can try to transfer the lease but this can take a long time and every month you are looking for someone to take over the lease you are having to pay the rent.

The other issue is that lots of landlords will request a deposit on the property which is usually 3-months rent. If you take our example rent of £20,000 per year, thats a deposit of £5,000 (£20,000 / 12 x 3) that must be paid up front. The problem with this is that money sits in the landlords bank account until the end of the lease and even then they will probably find a way of not giving it all back through charging you for property dilapidations. So you need to find an extra £5,000 for your startup costs that you will probably never see again. It is always worth negotiating around this and trying to offer the landlord/agent either the deposit or the personal guarantee but not both. If they insist on both try to reduce the deposit down to a single month.

Negotiate the rent

You dont pay the asking price, you want to build a stepped rent model wherever possible. This will allow your business to find its feet before being loaded with costs. So your starting point is a period of free rent in the first year, 6-months would be normal more is better. Thereafter, suggest stepped rent up the maximum you want to pay. So for example if the landlord/agent is asking for a rent of £20,000 per annum you might offer:

Year 1 – £12,500 with 6-month free (you therefore pay just £6,250 that year)
Year 2 – £15,000
Year 3 – £17,500
Year 4 – £20,000
Year 5 – £20,000

Your three factors for negotiating on are really the rent, lease length and breakout length, moving anyone of these will alter the other. So if you wanted really low rent then you would go for a really long lease say 25 years with a 15 year break. However, just remember your risk, I would suggest for a first location you want to keep the risk as low as possible so strike a happy medium.

Time is a killer

The biggest lesson we have learnt around looking for locations is the amount of time it takes. Just finding the right location can take months of looking but even once you have found it the negotiating can take several months. Then lastly all the contracts have to go through lawyers so you add another month on for that. You are typically looking at 4 – 6 months to secure a location. In a good market where there is not much retail space available expect it to take 12 months plus.

In summary negotiate hard and walk away if the figures dont add up know matter how much you love the location because it will come back to bite you later down the line.