I am in the process of negotiating the purchase of an established wood working business. Part of the deal is determining the rent.
I have been informed that most businesses try to pay around 10% of gross sales on rent.
Does this hold true for the wood working industry?
From contributor Bi
I am not sure that has anything to do with what you pay? I would think a starting point would be what space of that nature is going for locally.
The cost in NY is not going to match the cost down south for example.
I would then think that the cost you pay should be less than the local market because you are buying the business. If there is owner financing (I hope there is some if not all owner financing) they are vested in your success and a high rent will lessen the odds of your success.
Good luck.
From contributor Je
If annual rent is $36,000 and gross sales are $250,000 Can business survive, regardless of location?
From contributor Pa
Depends on what the other expenses look like. 10% would be an upper limit for me, and we're currently closer to 4%.
36k means nothing by itself. Where is it? How many square feet? What kind of space is it? What are comparable spaces or better spaces going for in that location? How tied to that location is the business?
If you are purchasing, first thing to focus on is profits. Are there any? How much? Can they be grown? What else could you do with your money to make that rate of return? Or are you just purchasing a job?
From contributor Je
I am working with a consultant who is employed by the small business center in my state. I am wood worker not a business expert. I understand your questions and they are good and justified. That said, he ask me if I could see if there was an industry average.
I can see now this post is going to ask more questions then it is going to answer.
From contributor La
Triple net leases are common but not in all areas. So watch for the terms.
From contributor Al
Our rent is less than 3% of the gross; in 2009 is was about 8% because of the drop in sales.
From contributor Lu
I would contact a local real estate agent and ask for comparable rent prices in the area.
From contributor Pa
The accountants will tell you 5% or less.
From contributor Je
From contributor Pe
Our rent is currently running 1.95% of sales in a 13,000 s.f. plant in Texas. The AWI cost of doing business survey shows that the average is about 1.5%
From contributor St
So if you stop selling, do you get to stay there for free?
The two shouldn't be connected contractually as they aren't really related. Commercial property will/should be valued based on the overall property market where the building is located based on supply/demand/condition.
From contributor Je
Peter,
Thank you.
Steve,
What % is your rent of gross sales?
Geoff
From contributor Al
The only time you see rent tied to sales is in retail stores in malls, where its triple net plus a % of the gross
From contributor St
1.04%, but my rent is fixed and my sales are continuing to grow.
The other problem you could have is unprofitable sales. Just because you have sales doesn't mean you can sustain a higher cost.
It sounds like it might be the guy selling the business that owns the building and he's looking to continue to get a piece of the action? Continued revenue stream for a business sale isn't uncommon, but it needs to be tied to some type of performance based on the seller's continued contribution.
From contributor Ma
Jeff, my rent is 3% and my gross is close to yours. My space is 1200 square feet in a good location. Hope that helps
From contributor ca
we are @ 5% and getting lower each year, although our rent continues to climb for inflation
If I might, you must consider the actual potential of the business and the actual present heartbeat of it currently.
There is a time to look @ the square footage and determine is this a hindrance or a blessing. Lean principles can help you get all potential out of the building
Don't pay for percentage, this is not healthy in a manufacturing facility
As always, do your research
If you are looking @ a triple net lease, you need to get all upgrades and maint needs taken care of in writing before signing on the dotted line. Also, get in writing, the actual request of the owner of in insurance you need to provide for them, vs what you need for you and your completed goods
From contributor La
A little less than 4%. I suspect what you get for your rent varies a lot. Ours includes: 5 OH doors, 2 loading docks, 80' clear span, 18' side walls, paved parking, sprinklers, 800amp 3 phase.
From contributor Da
I agree with those that say paying a percentage of sales is not a good way to go. I'm not sure if you were saying that was the proposal, or if the amount being asked happened to coincide with 10%.
I own our property through an LLC and lease it (triple net) to the company at an amount that comes out to 3% of sales. The amount was determined by talking to our local regional development board guy to get a market value.
Part of what the value is, is access, building configuration and level of retail presence. Take just one of those variables, a run down place in the woods that has all the space, access, working conditions, etc is going to have a lower market value than a place between the Porsche and Mercedes dealer. The question is whether you can justify spending the extra money as part of your advertising budget to get eyeballs, and "assurance" for prospective customers that you are a smart, trustworthy "real" business and not some fly-by-night that will be gone with their deposit.
Remember the three most important factors in real estate value: location, location and ummm, oh yeah - location. But also don't forget that what matters about that location differs per user. What's valuable to you may not be to someone else and vice versa.
