Evaluating startup costs can be difficult for new retailers. If several of the steps to planning a business requires you to have a retail business license, how will you obtain the necessary information to determine whether or not your retailing business plan is a viable one? The bottom line is many of the figures for the business plan will need to be estimated.
Likewise, if you're planning to seek a loan from the bank for your retail business. The bank wants to see that you've taken into consideration the costs of doing business and will want a fairly accurate picture of what your costs are going to be. This includes your rent.
How to Budget for a Retail Space
So how do you know what you'll be paying in rent before you pay it (or before you even know where you'll be locating)? You have to do some research and get some solid figures from building owners and/or management companies. Know the high end and the low end of other retail rents in the area where you want your store to be.
Start by looking at vacant properties in the area you want to open your retail store. Most areas have an average price per square foot. For example, a store in a popular shopping center located directly in front of a busy highway may run $23 per square foot. So for 1,900 square feet, that would cost approximately $3,642 per month.
[Total Square Feet x Price per Sq Ft. ÷ 12 (months) = Monthly Rent]
A similarly sized stand-alone building located one-half mile from that store may only be $11 per square foot. For the purpose of writing a business plan, using an average price of $17 per square foot would be a safe assumption in this example.
Analyze Lease Terms
Another big consideration is the type of lease terms you will be getting. Most landlords in a commercial space like retail will pass along their costs of doing business to you as part of the lease agreement.
There are three common charges added to your base rent each month. Typically, a landlord will charge you for CAM (common area maintenance) which is the landlord's costs to maintain the parking lot, lighting, etc. for the center you're located in. In addition, landlords will pass along the cost of the property taxes for the space. It is also common for the landlord to ask you to pay the insurance premium for your space. While you may (and should) be required to carry insurance for your property located in the space, the landlord carries a policy to protect him from damage to the space while you are leasing it. The cost of this premium can be passed along to the lease.
If you have a lease with all three of the costs described in the last paragraph, this is called a "triple net" lease. This refers to the fact that your lease is the base rent, plus CAM, plus insurance, plus taxes or net of the basic rent. Make sure you are very careful in investigating this condition for leases in your area. It is more common than not for a landlord to use a triple net system.
This means that your rent from our example ($3,642) could actually be an additional $200 per month. That is a significant number. We have met many retailers who left these costs out of their pro forma and found themselves in severe cash flow trouble once they opened their store.
Be sure to estimate the cost of utilities, maintenance, your property insurance or fees and possible rent increases. Ideally, that last item will be predictable, since you'll likely sign a lease for a fixed term at a specific race. But read the fine print, and know the conditions under which a rate increase could occur.
Alternatives to Renting Retail Space
Increasingly, startup businesses are forgoing the traditional route of renting a storefront, instead relying on co-working or shared spaces to save on costs. If you're planning to do most of your selling online, you may not need a brick-and-mortar location at all, but just a physical address for tax purposes.
And for seasonal retail operations, it may make more sense not to have a permanent location, instead opting for short-term rental of a booth at a farmer's market or a kiosk in a mall or other busy location. While these options will save money in the short term, they can be harder to figure into a budget since they aren't a traditional fixed cost.
You should also be on the lookout for any startup incubator spaces in your area, which usually come at no cost to a new business. Incubator spaces aren't ideal if you're planning to sell your goods directly to customers, but can be helpful when you're still getting your business off the ground.