October 12th, 2012 | Add a CommentFollow @justelementary
Negotiating a new lease for a new location and trying to figure how long it will take to get your doors open for business?
There is a lot to consider when it comes to timing and budgeting, and here are a few of them:
● Working Capital
● Security Deposit and First Month’s Rent
● Tenant Improvement Costs & Carrying Costs
● Municipal, County & State Permits
● Opening Inventory/Supplies
● Payroll Budgeting
Working Capital Needed to Start a Business
Working Capital is a key consideration when looking for a location to lease or purchase for a new business. Just how much do you need, and when you will need to have it is key to successfully opening a business for sale. Running short of Working Capital is a pitfall you want to avoid. Let’s start with some items you will need to budget for in order to calculate the working capital that you need.
First Month’s Rent & Security Deposit
When it comes to your rent obligations, at a bare minimum you will need to have enough funds to cover the Security Deposit and the First Month’s rent. The Security Deposit is typically equal to the first month’s rent, but could be more, such as two month’s rent worth. For commercial properties there are not typically any restrictions on this, so it could be three month’s worth or more. Also, keep in mind when the space is being built out with the Tenant Improvements, rent may accumulate and be payable, unless some concessions are negotiated.
Tenant Improvement Costs, Permitting & Carrying Costs
Tenant Improvement costs are often times the largest item to budget for. Two things to consider here, the actual cost of construction, and the carrying costs. The actual cost of construction can be estimated with contractor bids in advance of starting the Tenant Improvements, just watch out for change orders increasing the bill. The Carrying Costs depend on how much time the construction will take. This is not just the physical time in construction, but also time spent getting permits and approval from local agencies governing it. So, let’s say it takes six months to finish the Tenant Improvements, then you have to budget for up to six months of Rent payments, plus permit costs, and construction costs. This is where it is important to negotiate some concessions from the landlord for the costs associated with the Tenant Improvement costs. See here for negotiation tactics. (Free Months of Rent, Reduced Rent, Landlord ‘Contribution’ to Construction, etc.)
Fees & Timelines for Municipal, County & State Permits
Many people are surprised at the cost of municipal fees for to legally operate a business. Many cities require a basic business license which have a nominal cost associated with them. Check, and double check, what the ALL of the fees are. Are they a flat fee, or are they based on a percentage of gross revenues? Some cities require a Conditional Use Permit (C.U.P.s) for certain types of businesses. C.U.P.s can involve an approval process with one or more municipal agencies, which leads to the uncertainty that the C.U.P. may be denied. Beyond this, a C.U.P. can require architectural plans, drawings and fees that can range into the thousands. Be prepared for this by doing your homework.
Once you have the Tenant Improvement costs and timings budgeted for, it’s time to consider actual opening operating costs. This involves procuring any necessary Inventory, Supplies, Furniture and Equipment necessary to conduct business and process customer orders. These are all expenses that come before any receivables are received.
After accounting for the tangible items of Inventory, Supplies, Furniture and Equipment, it’s time to budget for payroll and engage in the hiring process in general. Obviously, you will need to budget for a few weeks of payroll, but more importantly, you’ll need to start the hiring process early enough to have the time to hire the right people and to train them before opening for business.
This sounds like a big list to take care of, and it is, so don’t delay! Each day that goes by costs you money, but since haste can make for serious waste, do your homework, make a good plan, and make sure to stay on top of EVERY action item. Contact our client care manager, Sonia Chhabra, for more information on your options to get the best lease terms and assistance with getting your business up and running ASAP. Telephone (888) 926-9193 or email email@example.com
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