Small Business, Big Lessons™ – Before You Sign

We’ve discussed considerations for finding a location that meets your business needs, touching on TICAM (taxes, insurance, and common area maintenance) and other potential impacts to your business. Today, we’ll be taking a look at leases, and a few areas that can have unexpected negative outcomes.

A small business is started with a dream and a positive outlook. If a small business owner didn’t think positive, they would never make the decision – and take the risk – of starting their own business. There are plenty of risks in business, and even something as basic as a lease itself can be a risky proposition if you’re not properly prepared. One point that cannot be stressed enough is the need to carefully read and thoroughly understand your lease. Seek out an attorney that specializes in commercial leases, and have them simplify costs, search for hidden terms, examine your personal liability and exit strategies.

Simplify Costs – Here, it’s essential to negotiate to cap TICAM. Typically, there is a cost of inflation cap per year, and you should be trying to get a maximum cap for the term of the lease. Taxes are typically passed through and allocated as a portion of space, and it is well worth trying to negotiate a cap. We discussed where Durham recently reassessed, and rates nearly doubled. Absorbing such an increase is difficult. The landlord does not have incentive to appeal tax rates, since their property value increased, which is great for them. Your tax bill increased, and that extra expense can be painful to you! Does your location have metered utilities, or are they all pooled? If utility bills are pooled, understand how they are allocated and the distribution of costs.

Hidden terms – Some leases also have requirements to participate in marketing campaigns or to pay a percentage of sales above a certain point as “additional rent.” Participating in marketing campaigns or other hidden terms could be worth considering when taking the lease as a whole under consideration, but when you’re already paying for the privilege of occupying a space with your business, why sign a contract that demands that you share your success with a landlord? There’s no reason for this, unless you negotiate a lease well below fair market value, and your landlord is essentially gambling on the success of your business. Even then, it’s a risky and dangerous proposition that simply isn’t worth it. If terms demand that you pay marketing fees, ensure that they are capped and clearly identified on how they will be spent. A built-in marketing strategy may be a good way to have a greater reach and cross sell your product, and weighing your options is your business decision to make.

Personal Liability and Exit Strategies – Another not-so-obvious point is the ability to relocate your business. If your business had a prime endcap location, you wouldn’t be happy if you were forced to give that up for a less visible storefront. Work with your attorney to have a clear understanding of your total liability should you break the lease early, sell, or transfer the business. Look into restrictions on the type of business you can assign the lease to, as well as the transfer costs and overall approval process. Do you have liability if you assign the lease for the term of that lease, or any renewal options? Keep that data very close – you should understand all of these elements before you sign. Get guarantees in writing, and read carefully.

Think Through – Some landlords will negotiate, and others will take a hardline approach. Most will have flexibility in some areas and are open to negotiating. In any event, make sure you have an experienced realtor and proven legal representation. Take time to understand all costs, including exit costs, and search for potential pitfalls. You need to understand the timeline, and remedies, if either you or the landlord default.

I would like to hear some of the hidden items you have seen in leases, and how you worked around them or if you walked away.

About the Author:

Gregory Woloszczuk is an Entrepreneur and experienced tech executive that helps small business owners grow their top and bottom line. Gregory believes in straight talk and helping others see things they need to see but may not want to with a focus on taking responsibly for one’s own business. He and his wife, Maureen, started GMW Carolina in 2006.
Gregory has been fortunate to have been part of building teams for companies that went through hyper-growth as well as his own company. He also has experience in working through economic downturns and taking responsibility to fix what is in his control. The focus has always been working with partners, customers, and building a successful business channel. His range of experience includes marketing, sales, support, training, and operations.
Gregory holds an MBA from Nichols College.