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Thursday, August 11, 2011

3 Costs Your Retail Start-up Should Avoid Paying

In previous posts dedicated to the retail business, I've briefly discussed, 10 Tips To Follow When Searching For Office Space, and 7 Ways For the Retail Start-up To Get Traffic. 

Today I wanted to focus on the thing that most retail business owners miss during the excitement of launching a new business.

Costs. They hang on to retail startups. And they can add up.  

You're starting a retail business and opening a storefront location to service walk-in clients. This means that unlike the bootstrapping businesses out there that sometimes get started out of a garage, kitchen or bedroom, you can't afford to skim some of the costs that they can. There are quite a few things that you'll need to look evaluate.

In my previous business, I owned a business planning agency that worked one-on-one with retail and service-based businesses. We helped during the start-up planning phase. Our clients had start-up funds, but they also had start-up costs that added up. My job was to help them lower those costs.

These are just a couple of ways we helped them do that:

3 Things You Don't Want Your Retail Start-Up To Pay For

Don't Pay For Build-out Costs 

This is the term used for the type of remodel or restructuring that will have to be done to the space before you can operate a business there. For instance, if you're renting a space that was previously used as storage for another business, you may have one big room that may need to be turned into a few separate rooms. Or if you're starting a spa, your state will require that you have rooms that meet certain specifications. You should not be paying for all of this yourself. The landlord has some duties and responsibilities within a down market.

I had this discussion with a banker who was financing a deal for one of my retail customers. "Whatever she does, she should not be paying upfront for any build-out costs. We'll make sure that this doesn't happen," was his response when I ran the scenario by him. He went on to say that his past five landlords were coming through on deals. This guy specialized in business banking and had funded a few of my clients.

The owner of the property may come in at half of the build-out costs, or they may pay for it in full and charge you a portion on the back-end of the lease. Whatever the scenario is, be sure to save your start-up cash for the stuff that may cause your business to close down quickly if you weren't careful--like operational expenses.

Don't Pay Rent... 

As soon as you walk into the door.

It's no secret that everyone has to pay rent, after all no one gets a space free of charge right? However, retail startups want to do all they can to avoid paying rent the very first month. Don't even think that you're crazy for requesting this from the property owner because this is standard (with minor exceptions for a couple of states). Think about this way, there are so many other miscellaneous costs that will smack you in the face and tell you to wake up to the world of retail ownership: like getting utilities turned on, ordering your first batch of inventory, signage for your location, retail CAM charges, etc. Adding rent to that could be disadvantageous to your business.

And most building owners understand this. When working with retail clients, my team and I have been able to negotiate three, six, and twelve months free rent (the twelve months was a big deal, but there were reasons for that one).

Don't Pay If The Business Doesn't Take Off

Ahh the worthwhile "contingent upon _______" clause. Some retail startups find themselves having to act as a business in operation even when they are in the pre-start phase. For example, a trade school has to get a location, set it up as if it's ready to open for business, and then wait to get the go-ahead from their state (state certifications) before formally opening to the public. Well what happens if the state decides against licensing the school? Should the start-up owner still be liable for a lease that does not have a business running?

The same thing applies regarding business financing. What if a start-up owner gets the lease and is hopeful that an investor will be helping to fund the business? The investor goes bankrupt and the start-up owner decides that he/she may not have enough to continue with the business. A "contingent-upon-financing" clause may mean that he/she will not be held liable for the lease.

How To Get This Done

Get a lawyer and a commercial realtor. In the past, my agency never closed a retail deal without these two principals communicating with each other, with us, with the business landlords, and with the client. Here's how I see it, a good lawyer will lessen your liability, a good commercial realtor (notice I stressed 'commercial') will make sure the landlord takes some responsibility.

You can't do this alone.

Cheryl Isaac is a business strategist and entrepreneur who has been in love with startups and their idiosyncrasies for years. She is a former investment and small business banker who believes in making business personal, an author, international business contributor to Forbes, and the founder of StartupBizTalk. You can find her here on Twitter and Facebook. 

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