Make the right decision by adhering to these rules
When the owner of a growing business leases their first office location, they’ve reached a significant milestone. They’ve shown a commitment to achieving their aspirations and goals, a willingness to take a risk on their ideas. A signed contract represents their dedication, determination and confidence.
That said, signing a lease is an enormous decision no businessperson should take lightly. It’s essential to remember some of the critical rules to avoid potential pitfalls and problems. In this article, we’ll detail five of those rules, touching on everything an entrepreneur should know moving forward.
1. Take It Slow
Many entrepreneurs and small business owners feel the impulse to lease the first space that appeals to them. If it’s spacious enough to accommodate their employees and equipment, they believe it’s best to capitalize on the opportunity before someone else does. This is counterintuitive to finding an ideal location.
In truth, those who are searching for an office should show restraint as they browse commercial properties. Some entrepreneurs and business owners may benefit from multiple short-term leases, moving from office to office until they find their perfect location. A multi-year lease in a small space can stunt growth.
As a business builds momentum and begins to expand, its owner should take care not to commit to a lease that will inhibit them.
2. Predict Future Growth
An entrepreneur who sustains the success of their company will eventually find their original office space insufficient. Though they have a grasp on their current needs — the space they require for staff and equipment at the present moment — their future needs will likely differ. Planning for growth is essential.
Commercial property owners will sometimes include a Right of Expansion clause in their lease, which allows a tenant access to additional space before making it available to the public. If this is an option, an entrepreneur can expand without difficulty, but if it isn’t, they might have to relocate to a larger office.
Those who are leasing for the first time should look for the Right of Expansion clause before agreeing to the purchase.
3. Inspect Your Lease
This is typical advice for first-time tenants, but there’s a solid reason why entrepreneurs and business owners should inspect their lease. They’re signing a binding contract with the property owner, and if they’re unaware of all the terms of that agreement, they may find themselves in an inconvenient situation.
While reading through a lease, entrepreneurs and business owners should consult a commercial real estate attorney. Commercial property owners use industry-specific language to refer to some aspects of the space, and this has the potential to confuse a tenant unfamiliar with the terminology.
Once they have an understanding of the lease, they should still pause. Most commercial property owners are open to negotiation.
4. Negotiate the Terms
Rent is an enormous expense to a business in its early stages of development. During this vulnerable period, entrepreneurs and business owners have their attention divided between many different responsibilities, and finding money in the budget is challenging. Financing is also difficult to acquire for those who intend to buy.
To provide context, an alarming 52 percent of commercial real estate realtors have had clients fail to secure financing for commercial properties within the last 12 months. Whether they’ve decided to purchase or rent, entrepreneurs and business owners should negotiate the terms of the contract for the best deal.
That said, those who want to negotiate their lease need leverage, and they might struggle to offer anything of value. In any case, they’ll need an exit strategy.
5. Plan Exit Strategies
Exit strategies are necessary in worst-case scenarios. An entrepreneur or business owner who’s unable to afford their rent and can’t negotiate will need to cut their losses. If the profit from their business can’t cover the associated expenses, an exit strategy is the metaphorical parachute that helps them land on their feet.
These type of strategies can also act as a fail-safe to prevent total collapse. For example, those who are operating a very small or new business should have assets on hand to pay their lease or mortgage if revenue isn’t as high as projected, whether it’s due to seasonal fluctuations or poor marketing.
In short, anyone attempting to get their small business off the ground should have a financial emergency plan in place to ensure their security.
A Significant Milestone
Leasing an office location is a significant milestone, but it’s also a considerable risk. Entrepreneurs and business owners should take caution throughout the process to limit this risk, being careful not to overlook any essential details. They can’t rush their search, think only about the short-term or sign a contract without reviewing its terms.
As long as they follow the five rules above, a businessperson can move forward feeling confident about their decision and enthusiastic for the future.
Written by: Holly Welles
Holly Welles is a real estate writer who covers the latest market trends in everything from residential to commercial spaces. She is the editor behind her own blog, The Estate Update, and curates more advice on Twitter.