Truth be told, a novel could probably be written on this subject alone, and not a flimsy little book but a hefty, borderline encyclopedia-sized one! Since we don’t have that kind of time together let’s start with 5 Rules that are going to be invaluable to the success of negotiating your new restaurant lease.
With this in mind, here are are my three recommendations for making the most of your air travel in 2018:
Rule #1: Get Representation
Make sure that your representative is smart, savvy and most importantly, experienced in your particular industry of business. You truly want someone that is an expert in the field as it will save you a lot of time and money in the long run. Talk to your lawyer or broker and ask as many questions as you can. Do not be afraid to push for explanations! I have personally secured multiple legal clients simply because they know I also own and operate restaurants. It is safe for many of these clients to assume that my understanding of the particulars in the restaurant field will result in their securing the best possible deal. Avoid having a broker that works both sides as it is very difficult to represent both interests fairly without eventually making unwise concessions for one.
Rule #2: Use a Fine-Tooth Comb
Don’t take your landlord’s word for anything. Request verification of all representations in writing. I have seen the stated square footage of a location vary by as much as 10% from the actual square footage. You can imagine how grievous this type of error can be on a large footprint, but realize that even on a smaller venue a 10% discrepancy can have a crippling effect on your business. The other area where I have seen this be very problematic for a tenant is in terms of the zoning for the particular location. As you may or may not be aware, in most cities restaurants require specific zoning or entitlements in order to to operate. Furthermore, there are often additional restrictions on a state level from the respective ABC (Alcohol Beverage Commission). Your broker or lawyer should be able to help you navigate this but you can also do your own due diligence by going to the city’s planning/zoning website and search online for your state’s specific ABC requirements. Ask your landlord for the prior year’s tax and utility bills. A significant percentage of leases are “triple net”, meaning that you are required to pay your percentage share of the landlord’s property taxes and utility bills in addition to your base rent. It’s also not a bad idea to ask the landlord if they are planning on selling and or refinancing the property as this can have a dramatic effect on your share of the taxes. I am not sure how honest they will be but it can’t hurt to ask!
Rule #3: Mull Over the Term Again
Take the extra time to consider, then reconsider the length of your lease term. If in doubt, go shorter. Your landlord is going to want you to take a long lease because it’s in their own best interest to keep you there as long as possible. For a budding restaurant, you want the option to be there for a long time but it’s also very important to not be chained to a losing proposition for eternity. I have always felt that a five-year initial lease term with two five year options works well for most concepts. The option renewal is a grant to the lessee that enables them to continue the lease at a specified rate for an extended period of time. Two, five-year options for example, would provide for the extension of the lease totaling ten years past the expiration of the original term (fifteen years in all). This is an ample amount of time to generate income should the restaurant be successful, but would also yield an exit strategy at the end of the initial five-year term should the venture be failing. It’s extremely important to negotiate a favorable rent adjustment at the beginning of each option period. The landlord will usually attempt to adjust the lease to FMV (fair market value) but one thing is for certain, they will build in a floor figure to ensure that under no circumstances does their rent decrease. If your landlord is insistent on an adjustment to a FMV it may be beneficial to instead offer a threshold percentage of FMV whereas to not exceed a specific figure. The key for you in this negotiation is to ensure that your rental adjustment is not so egregious so as to undermine the feasibility of the business.
Rule #4: Crawl the Neighborhood
Pound the pavement and learn your neighborhood. The landlords and the brokers are always going to tell you how wonderful a particular location is. You are going to hear about what’s coming into the neighborhood and how this particular area is the ‘next big thing’. The truth is, every single area can’t be the next big thing despite all representatives in their respective areas claiming so. Some areas develop more rapidly than others. I remember over a decade ago everyone in Los Angeles was screaming to anyone who would listen that Downtown was the place to be and that if you didn’t urgently get on board then, you’d miss the boat entirely. Guess what? It really did happen and Downtown is in fact the place to be now but it didn’t happen 10 years ago. It took a lot longer and I happen to know multiple people who jumped in back then and simply couldn’t survive long enough to now be a part of the evolved neighborhood. Really get out there and do your homework. I’ll often meander around the streets for hours and talk to everyone and anyone who will listen. Find out what’s really going on in any particular area and remember that one block can often be the difference between success and failure. Take a trip down to your local planning office and ask around to see what is going on in a specific district. There is truly a world of incredible information sitting at your local city hall just waiting to enlighten you.
Rule #5: Never Personally Guarantee Your Lease
I can think of 150 reasons why you shouldn’t and 0 why you should. Your landlord is always going to ask for it and some will demand it but my general rule in this area is to just say no. The cold hard truth here is that restaurant businesses fail fairly often. You want to make sure your business has the greatest chance of success but alternatively, should the business not succeed, you don’t want it to drag you down too. Get creative with your landlord and offer a corporate guarantee instead. If they say no to that then offer an increased security deposit. There is also something called a “good guy” guarantee for you to consider. This means your personal liability for a lease default is limited to the rent that accrues up to the day you leave the premises. Again, sit down with the landlord and get creative. I have yet to lose a lease because I refused to personally guarantee it.
I hope these 5 rules help you as you begin this exciting journey. This list is by no means exhaustive and only includes what I believe are the foremost crucial rules. As I wrote this, several other key came to mind so stay tuned for a sequel to this article!
“Location, location, location!” You have heard this phrase a thousand times because it’s the tried and true mantra for real estate. How does it really apply to commercial real estate? Just how important is location to the success and longevity of your entrepreneurial venture in particular?
The short answer to this question is that location, location, and location are the three most important considerations to prioritize to ensure the successful operation of your business. As you might imagine, the long answer is more complicated commands a more in-depth analysis.
The first question to ask the budding entrepreneur is what type of business they are planning on opening. Is it a restaurant or hospitality-based venture? Is it a specialized service-based business such as a general contractor or electrician? Or is it a retail shopping store such as furniture, or clothing? Let’s start with a service-based business as this may be the exception to the paramount importance of location in your decision. As a general contractor for example, you will be doing the majority of your work outside of your office and probably at your customer’s home or business. As such, there is little need for an impressive office in a costly location. Furthermore, as a contractor, flooring expert, painter or the like, you may have the need for significantly more square footage to show samples of your work, your offerings, or models of prior projects. This would make a high rental rate location simply not realistic
Say you’re not opening a service-based business but rather a restaurant, hospitality or shopping business. Where then does location land on your list of priorities in these instances? In my humble opinion, it lands square in the top three locations (pardon the pun). Your coffee shop, shoe store, or fine restaurant better be in the best possible location. This begs the question of where, and what makes the best location. We can start with the most evident factor: traffic and visibility. You want your new business to be seen by as many eyes as possible. Because you’re a smart entrepreneur, you already understand that there are different types of traffic. There is foot and automobile traffic, and also up for consideration is your parking situation. All the traffic in the world isn’t going to do you any good if people cannot park. Even though not all traffic is created equally, there is no substitute for your business being in a highly-trafficked area. Bear in mind that if you are betting your bank on automobile traffic, there better be a good source of well-lit and secure parking options in close proximity.
While traffic is a huge component to determine the quality of a location you must also look at the relevancy of the business in relation to the area. While you may have found a location with a massive amount of traffic and plenty of parking, it is more important to ensure there is a need for your business with the demographic in that area. Let’s use a very obvious example to illustrate what I mean. A coffee shop near a university, or a sunglass and bathing suit store on the beach should prove to be very successful. Conversely you probably wouldn’t want to put that same bathing suit store by a ski resort in Canada. Simply put, if you’re playing the traffic numbers game then make sure your business is appealing to as many of those potential customers in the area as possible.
Let’s expand on the importance of said demographics with any particular traffic. It is fairly easy to determine the demographic makeup of any given area as there are multiple companies that provide statistics detailed and intricate beyond your imagination. However, the key statistics that would best assist you in determining the suitability of your business in a location would be: age, income, education, and population.
In summation, we know that location is of paramount importance, your business needs traffic and parking options for said traffic, and that you must do your due diligence in ensuring the demographic has a need for what your business plans to offer. Many of these key points are not surprising at all, and you might be thinking ‘I already knew that!’, but keep in mind that fundamentals are usually not ‘new’ ideas at all; we know them and have always known them even, but to really apply what we know is key. Here are a few less-known tips that might not be quite as obvious!:
1) Follow the competition! This may oppose your natural inclinations but think about it, there’s a reason you often see restaurants clustered together: that location is such that it can support multiple eating establishments and likely boasts a demographic already primed for what you offer. If you see a bunch of restaurants and they all seem to be doing well then don’t be afraid to throw your hat in the ring and join the party. Just make sure that whatever you’re offering is at least as good as the competition.
2) Don’t be afraid to pay extra for the best possible property within an incredible location. You will see this instance with malls and commercial shopping centers. Often times it’s not enough to just be in the specific location; you want the best possible venue within the commercial development as well. Perhaps you have found yourself a space within a world-famous shopping mall. It wouldn’t be as great if you were the last store in that mall, hidden away in a corner difficult to find, or worse yet, furthest from all of the parking. ‘If you build it they will come’ won’t ring true if they can’t find it! Remember that people go to shopping centers and malls for convenience so if you’re going to pay the premiums to be there in the first place, pay a little more to have the best property within your desired location.
3) Stop thinking with short-sight about today and tomorrow, and start looking further into the future, making your plan robustly all-encompassing. The internet has made knowledge so accessible that we can literally see what is coming in the next few weeks, few months and even few years. Go to your local city planning department and see what is being developed in your area. There may be a location that’s about to explode with new developments and with the right timing you could take advantage of it. Realtors can be a well of information with regards to upcoming developments in an area as well because their success depends on it so ask around, pound the pavement, and jump online.
What is the long and short of this all, and the penultimate conclusion of what takes priority over all other considerations with your budding business? Location, location, location!
As an owner of multiple restaurants, I am often asked by restaurateurs if they should expand on their units and when to do so. This is such an interesting question because the answer lies not only in an empirical evaluation of the logistics of the business but, of equal importance, the desires and goals of the individual person. I know quite a few restaurateurs who are not only successful, but also possess certain characteristics that would support multiple units yet they are simply not eager to jump into the expansion pool. I remember thinking to myself in the not-so-distant past: ‘why would someone not want multiple units? Surely two is better than one and three is better than two!’. However, after growing multiple restaurants I can now see why there is apprehension towards expansion, and the timing is and suitability is worth evaluating.
The first thing I would tell the operating restaurateur is to understand that once you open your second location, the restaurant can no longer be driven wholly by passion and must truly become a fully accountable business. The time that you used to spend at the end of your bar with your favorite customer may now be spent pouring over P&L’s and cash flow statements with your bookkeeper. Attention to minute detail becomes of paramount importance and terms like economies of scale and loss leaders take up an ever-expanding role in your vocabulary.
When analyzing the business of single-unit operators, one can often see a multitude of decisions that do not necessarily follow logical business evaluations but instead reflect the personality and beliefs of the owner/operator. Decisions in single-unit restaurants may be made impulsively. The rules and regulations are often not categorical, and are rather dependent on the whim of the owner/operator. Regulars who are on good terms with the owner appear almost as owners themselves and comps and discounts are often rampant. With that being said, the success of single-unit operations is often highly dependent on these seemingly unorthodox practices. A very sincere and deep loyalty between the patrons and the owner/operators is developed. The owner/operator is frequently at the location for the majority of the operational hours so labor is also greatly reduced. Finally, and most importantly, no one will ever pay attention to the needs and wants of the customer in the manner that the owner will so in general, customer satisfaction is usually very high at a single-unit operation.
From an expansion standpoint, you must keep in mind that many of the practices that make a single-unit concept successful cannot and will not translate into multiple units. The first and most obvious one being that the owner/operator cannot be in two places simultaneously. Try as they might, it’s a physical impossibility. They will quickly find out that there is a strange, immutable law that somehow creates emergencies at the location with which they are not present. Secondly, expansion into a second unit often leaves a vacuum in the original location. Even with a competent and charismatic general manager you will often hear grumblings like “the place isn’t the same since __________ left,” even if the statement is completely unjustified. It also seems unavoidable that everyday trials and tribulations are left unanswered as often the solutions were in the head of the owner/operator that was once conveniently at their disposal. An example of this would be finicky kitchen equipment that only the owner/operator knows exactly how to work, or the regular patron who indulges a little heavily on the spirits, gets a too spirited and won’t listen to anyone except the owner who they have a long and storied history with.
Now that I have scared you with the woes of attempting to capture lightning in a bottle with your expansion, let’s highlight the upside. As all of you restaurateurs know, there is little that will instill in you a greater sense of pride than walking into your restaurant and being greeted with the warm hum of people in the midst of merriment. To be told that your restaurant is a patron’s favorite establishment or to simply see the look on the face of a satisfied customer is a feeling that is beyond compare. To see something that you have poured so much of yourself into, grow into a successful business, is truly wonderful and will make you believe the old adage, “if you love what you do, you will never work a day in your life.” With expansion comes a broader network of customers, employees, vendors, and partners; a larger family, if you will. I can say from personal experience that employing almost 300 people is something that gives me a profound feeling of happiness and accomplishment.
The expansion of your business into multiple units can also potentially be an extremely lucrative endeavor. You can easily imagine multiple profitable units resulting in the creation of wealth and there is no shortage of success stories validating such. As much as expansion can create difficulties and complications from an operational perspective, there is no denying the potential increase in income, and the exponential growth in the value of the brand. Multiple locations also provide for the allocation of certain expenses amongst the units, and increased buying power for the brand as a whole. These factors result in a direct and positive impact on the overall profitability. The question of whether or not to expand should be based on an analysis of the goals and dreams of each individual owner/operator. There are some distinct benefits to growth and they must be weighed against the complexities inherent in the expansion of any business.
Should you decide that expansion is in your future, the next question would be, when?
Over the years, I have been involved in raising capital for ventures ranging from restaurants, bars, jewelry, real estate, mobile applications and nutritional products. As a lawyer and entrepreneur, one of the most common questions I’m asked is how one should go about raising money for their start-up business. Many have anticipated my answer to reveal some sort of secret special place, or hidden money tree that is known only to a select few. However, you can probably guess there is no such place.
Much like the business you are seeking to fund, the better prepared you are to raise the money, the more successful you will be. It may be a seemingly insurmountable task, and at times throughout the process it can be very daunting, but following a few simple steps will help make the difference between Feast or Famine. While the businesses may vary greatly, there are some principles and guidelines that will remain consistent throughout the capital raising process. There are also multiple sources of financing but for purposes of this article we are just going to discuss private investors.
1. Start with Family and Friends
The most important step to raising money for your product is simple, you must get started! Talk to your family and close friends. Tell them your idea and see what they think. I always think of family and friends as the low-hanging fruit from an investment perspective. Every single one of us knows someone that will back their idea no matter how hair-brained or speculative it may initially appear. As you receive feedback about your idea from family and friends, fine-tune and structure your business plan in order to strengthen your presentation to potential investors. They may also talk you out of your venture if its particularly nonsensical and thus save you a great deal of time and money. For those of you out there thinking “I have literally no family or friends”, first know that I’ll be your friend! However, you’re likely going to need more than one friend so start thinking about the billion people you have access to in the world of social media. Facebook, LinkedIn, Instagram, and any of the other popular sites are an abundant resource for networking so make a profile, present yourself well through interesting posts relevant to your goals, and get to work!
2) Polish Your Plan
Let’s assume that your family and friends not only think there is some merit to your idea but actually agree to invest. At this point you are in the game and it’s time to step it up! Take a better look at your business plan and spend some money making it look clean, enticing, and exciting. No one is interested in ‘boring’, if they wanted ‘boring’ they would invest their money into a savings account or a money market fund. Add pictures to your business plan. If it’s a restaurant or hospitality project show the investors the elegant seating, illuminated bar, and colorful cuisine. Let them imagine walking into “their” restaurant and being greeted by the smiling host or hostess. If it’s a cutting-edge new application, show them the outrageous growth in this sector. Compare the product to other successful applications and include some press on other similarly related technology.
Your business plan is also going to require a description of the entity (i.e. an LLC or Corporation). Contained either within the business plan or an accompanying document, a vehicle for the potential investor to invest in such as an offering memorandum or a placement memorandum. You will have to consult a lawyer for these items and I would advise it to be a specialized attorney that can show you other investment projects that they have served as counsel to.
3. Network, Network, Network!
Now that your business plan is clean, concise and ready, you hit the pavement trying to strum up some dollars. Hopefully some of your family and friends who have expressed interest pony up. If not then you hit your rolodex, social media and everyone you know that may have a few dollars burning a hole in their pocket. In Real Estate, the name of the game is ‘location, location, location’. In raising capital for your business venture, the key is ‘network, network, network’! There are individuals out there whose track record is such that all they have to do is pick up the phone and the checks roll in. Since most of us don’t have this luxury, raising capital turns into a numbers game so the larger your network, the more potential investors that you may have and subsequently the more money you can possibly raise.
4. Dress for Success
While you’re out there pounding the pavement make sure to bring your “A” game. If someone is going to trust you with their money you have to look the part. Wear a suit, blazer or sport coat. Clean your car to ensure that you look presentable and organized on all fronts. I want to warn you though that there is such a thing as ‘too nice’. I once went to a capital-raising meeting and took my friend’s car which was very high-end. The investor chose not to park any money with me and I later learned that the guy was turned off by the flashy car I was driving. The key is to put your best foot forward. Only you know what the best most presentable version of yourself is.
There is going to be an expense associated with raising money. Dinners aren’t free and neither is travel. How much should you invest in an investor? How many dinners, cocktails, and miles traveled? My general rule with private investors is that if it costs me 3%-5% to raise money then it was well spent. For example, I don’t mind spending $3,000-$5,000 to raise $100,000.
6. Ownership and Accountability
Lastly, and perhaps most importantly, treat their money like it is your own. Avoid being wasteful through overspending, always bearing in mind that everything is negotiable, from social media support to web site designs. Make use of websites that offer affordable marketing materials such as Fiverr.com and 99Designs. Think the barter system is dated? You would be surprised how many times I have successfully traded services and how fruitful that has been while entering into another startup venture.
In closing, raising capital will demand your full commitment, tenacity, and persistence. With these simple guidelines, you will be well on your way to building your great new business idea