The stat that 90% of new restaurants fold within a year is a myth. The number is actually much closer to 30%. However, a lot of restaurant owners have to go out of business because they signed a bad lease.
We’re not talking about a lease in a less-than-ideal location (location, location, location, and all that), we’re talking about bad restaurant lease agreements that end up draining profits and sabotaging the bottom line.
You can avoid this and give your restaurant a much higher chance of success if you’re mindful of these 4 parts of your lease.
The Liquor License
What happens if your liquor license takes a few weeks longer than expected? Do you push back your grand opening and pay for the space with no money coming in? Or do you attempt to open without it, and risk some very dangerous bad reviews?
You probably don’t love either of those options, so protect yourself by including a clause to terminate your lease in the event that you can’t/don’t retain a liquor license within a contingency period.
Repairs and Maintenance
Don’t drain your restaurant’s cash by paying out of pocket for repairs to the building.
One way to avoid this is by having any major repairs deducted from your monthly rent. Or, you might also try negotiating a cap on CAM (common area maintenance) charge increases.
Or, if you’re facing something major like a completely new roof, or an overhaul of the air conditioning system, try to negotiate for your would-be landlord to amortize capital costs over the useful life of the improvements, in accordance with generally accepted accounting principles. Now your costs are spread over 10 years, instead of the one.
This can keep your business flush with cash.
An Exclusivity Clause
You already know that your business will be competing with other restaurants in the area. That much is a given. However, you don’t want some new competition popping up a few doors down from you. And you definitely don’t want them paying the same landlord as you.
Getting an exclusivity clause in your lease can be absolutely crucial for restaurants opening in shopping centers, malls or strip malls. Your landlord will have multiple units up for grabs, and you cannot afford a competitor grabbing one.
A Personal Guarantee
If you’re a new or unproven business, your landlord may insist that a personal guarantee is a must-have for them, because they need to protect themselves in case you default on the lease.
No matter how steadfast they seem, you can often negotiate to find other ways to protect them. You can increase the deposit or have the clause removed after a year or so, instead of being on the hook personally for the entire duration of the lease.
Smart restaurateurs still have to close their businesses for reasons beyond their control. If that happens to you, there is no need to ravage your personal credit and finances with a personal guarantee.
Of course, there are far more than 4 things that can lead to a bad lease in the world of food service. However, the 4 we discussed today are big ones.
We highly recommend you work with someone who can review these leases for you. Their help can save you literally thousands of dollars or even save your business!