IncQuery: How to Renegotiate Your Lease

What you should do when your rent is too high, your bank loan doesn't come through, and you don't know how much inventory you're going to need.
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IncQuery

It may be true, as people say, that everything is negotiable, but coming up with the right negotiating strategy is not always so obvious. This month we hear expert advice about renegotiating a lease that's become an obstacle to your company's survival; dealing with an unexpected cash-flow crunch brought on by the rejection of a bank-loan application; and deciding how much inventory you should have when you're about to get a lot of good publicity.


Time to Change the Terms?
When my husband and I purchased our small retail bagel business, we realized that the rent was a little high, but we thought we'd have enough sales to cover it. Then came 9/11. Since then our company's sales have steadily declined. Do you think we should try to renegotiate our lease terms with the landlord? His minimall is now 50% vacant, and two other tenants are on the verge of collapse. We have loans that we have to pay, and we've already cut back everywhere else. A reduction in rent is our last hope. What do you think we should do? --Lynn


You should definitely talk to your landlord about reducing your rent. The question is, What approach should you take? "That depends on the landlord," says Jim Ansara, founder and chairman of Shawmut Design and Construction, a five-time Inc 500 company, who has worked with both landlords and tenants in the retail and restaurant industries. "Let's assume he's a reasonable and professional guy. In that case, you should figure out what you can pay and suggest making that amount your base rent. Go to the landlord and say, 'We really want to stay here, but we just can't make it at the rent we're paying. Here's what we can afford as a base rent right now.' And explain how you came up with the figure. Take him through the numbers, and show him why you'll be able to survive with the lower base rent but you'll go out of business if the rent remains at the current level.

"At the same time, I would make it very clear that you have no problem paying more as your sales come back. One way to do that is by offering to give the landlord a percentage of your gross sales over a base amount that you agree upon. That's a common arrangement in the restaurant business. It's not as common in retail, but there's no reason that some such formula wouldn't work there as well. In my experience, the landlord typically gets 5% to 6% of gross sales above the base sales level.

"Of course, if the landlord isn't reasonable, you have to take a different tack. Basically, you need to do a hardball negotiation. I'd go to him and say, 'We can't make it at the rent you're charging us, and we're going to be forced to close the store unless you give us some help.' Then see what he says. It's important to understand that you have a fair amount of leverage in this situation. Even if the landlord weren't facing tenant problems already, it costs him money whenever somebody leaves, in terms of lost rent, broker's fees to find another tenant, probably some demolition, and so on. My advice would be to hold out for a rent abatement of some sort. I think you have a good chance of getting one. For example, you can probably get the landlord to let you have a rent vacation, which would be preferable to rewriting -- and extending -- the lease. If you have problems with the landlord, you don't want to lock yourself into a lease agreement for a period that's any longer than necessary. You're better off keeping your options open."


All Cashed Out
My partner and I have been doing residential landscape installation for almost a year. We applied for a Small Business Administration loan and were told it was a sure thing. With that in mind, we bid on several commercial jobs and won them. We have contracts for a Lowe's Home Improvement Warehouse, a Sam's Club, a school, and several restaurants. In addition, we work with several home builders and a developer. Altogether, we have approximately $1.5 million in expected revenues over the next 14 to 18 months.

That is, we thought we did. For two months our bank and the SBA told us, "Don't worry about the loan. Everything looks good." Then, out of the blue, we got a phone call saying, "We're sorry. We can't do this loan for you." Now we don't have enough capital to purchase the plants we need just to begin the first round of commercial jobs. Most of the tree suppliers want 50% to dig the trees and the other 50% on delivery. We need $75,000 to $100,000 to get the first couple of jobs going.

I don't know where to turn, and I am desperate. The loss of the SBA loan was absolutely devastating. Any ideas would be greatly appreciated. --Roger


"In situations like the one you're facing, it's generally a good idea to look to your customers and suppliers for help," says Chris Davitt, chief operating officer of Ruppert Nurseries, who helped build Ruppert Landscape Co. into one of the largest and most successful landscaping contractors in the country. "I'd begin by trying to get your suppliers to give you better terms than those they're apparently offering you now. The arrangement you mention is not uncommon. It's even more common, however, for a nursery to let you pay in 30 days once you've established yourself as a credible contractor.

"Getting those terms may be a little more difficult if your company is new, but it's still not impossible. Most of these suppliers are small companies themselves. If you do a good job of explaining your situation to them, and if you come across as a solid, reliable individual, they're likely to give you the benefit of the doubt. Of course, it would help if you could show them a contract with a customer who's committed to paying for the material in question.

"You may also be able to get some assistance from your customers. In residential landscaping, it's not unusual for customers to pay one-third of the bill on signing, one-third on delivery, and one-third on completion. So you might be able to raise some cash that way. Those terms aren't typical in commercial landscaping, but everything is subject to negotiation. Besides, your commercial customers probably chose your company because they want to work with you. If you explain your situation to them, they may very well be willing to pay for the material on delivery. In fact, they may even be willing to pay your suppliers directly. If so, you'll have something else to offer the nurseries when you go in to negotiate terms with them.

"Beyond that, I'd just make sure that you have really learned the lesson of this experience. I don't think it's ever a good idea to rely on a bank to cover your normal cash-flow needs -- not if you want to stay in control of your destiny. There's nothing wrong with going to a bank when you need money for a big investment, like buying a truck, but you should be able to finance your growth internally. If that means starting small, so be it."


Stock It to Me
I have a one-year-old business that sells a women's fashion accessory through the Internet and through major retailers. Several national magazines have recently told me that they plan to feature my product in upcoming issues. My problem is that I have no idea what the response will be, so I can't come up with even a ballpark estimate of the amount of inventory I'll need. I'll ask the magazines for their advice, but I'm not sure how much they'll be able to help me. Meanwhile, I'm short of cash, so I'm not in a position to stock up on inventory unless I know for sure it will sell. Do you have any suggestions? By the way, my product costs about $50 retail and is going to be associated with an industry expert. --Kathleen


"Asking the magazines for advice is a good starting point, but you're still the one who has to pay for the inventory, so you have to make the call," says Jack Derby, founder and president of Derby Management, in Boston. Derby was formerly president of CB Sports, a leading skiwear retailer, and has coached several fast-growing consumer-products companies. "I have two pieces of advice. First, you should make a deal with your suppliers to purchase the component pieces of your product, assuming that it requires some assembly. Yes, you'll have to pay for the pieces, but you'll improve the delivery time of the finished product, and you'll reduce the up-front financial commitment that you'll have to make.

"Second, you shouldn't worry too much about the possibility of selling out your stock of finished goods. In my experience, selling out a consumer product -- and going to back orders -- is not such a bad thing. Unless your product is seasonal, consumers are generally willing to wait a couple of months to get it. They understand and accept the fact that they can't have the product right away because they didn't order it in time. I'm not suggesting that you deliberately create a shortage, but you have to err on one side or the other, and you're the one whose capital is at risk. If I were you, I'd keep your up-front commitment fairly small and say to the latecomers, 'I'm afraid we're sold out of that item right now, but would you like to back-order it?' My guess is that almost all of them will say yes."


Having Trouble Sleeping Lately?

Could you use some advice from an experienced entrepreneur who's been where you are and figured out what works and what doesn't? Send your questions to IncQuery@inc.com. Editor-at-large Bo Burlingham, aided and abetted by Street Smarts columnist Norm Brodsky, will find the best people around to answer them. And if you don't like their answers -- well, you can tell us that, too.


The Whole New Business Catalog

IncQuery: How to Renegotiate Your Lease
Marketing: Slipstreaming
Hands On: All Together Now
Search: Letter From Camp
Forecast: Here Comes the Sun


Please E-mail your comments to editors@inc.com.

Last updated: Jun 1, 2002

BO BURLINGHAM | Staff Writer

Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business.




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