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Your Rent Can Put You Out of Business

April 5, 2016
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News Nibbles: Big News in Bite Size

Your Rent Can Put You Out of Business
Too much above 6% of sales, and you are giving away profits
Presented by Restaurant and Hospitality Practice

The real estate market is competitive and rental rates are as high as ever. Too many operators focus only on the day-to-day operations of their business, and they overlook their lease, but your lease rate could put you out of business. A healthy lease is generally 6% of sales and 8% is reasonable, but once you get above 8-10% it’s time to renegotiate. If you are a large operation with many locations, the economies of scale can absorb a few bad leases, but you should still keep a close eye on the entire portfolio of leased locations to make sure it's not getting out of a healthy range.

Remember too that market rent is not necessarily the right rent for your business. Some restaurants need a below market rent to survive. Consider your long-term success – if you are thinking of signing a 5-year lease when the market rent is at the top, you might lose profits in 18 months if the market rent is down. A professional can help you negotiate the right lease for your business.