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Column by Jeff Landers
Why You Should Never, Ever...Ever Sign a Lease for Longer than 12 Months
Who knows what can happen in 12 months' time? Even you don't! So why would you sign a lease for more than 1 year?
Jack Barnes, a technology entrepreneur from San Diego, knew it was time to take his small business to the next level. "The last time I had a client meeting, one of the big bosses ended up sitting on a folding chair in the hallway between my bedroom and bathroom. That's when I knew it was time to make the change."
Just knowing it's time to move out of the home office is the easy part. It's what comes next that gets hard -- finding the right office space situation. In Jack's case, he was able to find some traditional office space that suited him -- it was nicely lit, in a good building and a convenient location, and afforded lots of room. Assuming his business would continue as it had been while at home -- or, perhaps even better, now that he was in proper office space -- Jack signed a three-year lease.
But four walls that feel right aren't the only key to a good office space strategy. For Jack, it was a short six months before he was buckling under the weight of his monthly rental payments because business hadn't kept up the pace from before the move. When I lecture to small business entrepreneurs, I call this section of my talk, "There is no hell like being locked into a long-term lease," because the standard three- to five-year lease that real estate brokers and landlords want you to sign can be catastrophic for a start-up business, which may not be on the same sort of growth schedule that conforms to those set lease periods.
As you well know, a lot can happen in a year. You might run into trouble and go bust. If your business starts to struggle after five, 12, or even 18 months into the lease, you are still legally obligated to continue paying the full rent to the landlord month after month for the entire three-year term -- that's almost 1100 sleepless nights!
And here's the rub -- the on-going rent payments for an office you can no longer use or afford will only put your business in a more precarious situation and make it even harder, if not impossible, for you to turn things around.
If you're lucky, you might be able to sublease your space to someone else, assuming your lease and market conditions will permit that, but instead of spending all of your time trying to keep your business afloat, you'll be wasting a lot of time and effort dealing with attorneys and brokers.
And what if after all of your valiant efforts, your business still goes under? Well, as far as your landlord is concerned, you're by no means off the hook since you probably had no choice but to personally guarantee the lease. So now, on top of all of your other problems (like no business, no job, no money), you have a remaining lease obligation of thousands, if not tens of thousands of dollars, hanging over your head.
This is one nightmare scenario. Another is that your business is expanding through the roof. You are turning over product so fast you can hardly keep up. And you are stuck in an office that no longer meets the needs of your burgeoning business. You are stuck in an over-crowded space that restricts your growth and compromises your ability to attract and hire new employees.
You can try to move some of your crew into additional office space nearby, but this kind of split operation can be an organizational nightmare for an expanding company and I've really never seen it work out well.
The solution is short-term, ready-to-use office space. This is, simply put, an office you can move right in to. It is fully equipped, furnished, and ready-to-go. It has high-speed Internet access, phone systems, furniture, fully functional conference rooms and in many cases a receptionist to answer the phones.
Real estate brokers typically don't show these spaces because there isn't much money to be made in helping you rent 120 square feet for 6 months. In most cities the commission on that deal would barely cover a nice dinner for two. That means you may never hear about these types of spaces and that's really a shame because it is probably the ideal solution for most start-ups, especially those just moving out of their home office.
These office spaces are available in almost every city and offer small businesses the opportunity to "test drive" a real office space. Entrepreneurs can take out a lease for one month, three months, six months, or longer. The point is you get to decide. Not the real estate broker. Not the property owner. Because only you know what's right for your business. And most importantly, it gives your business another chance to beat the statistics. As for Jack Barnes, he was lucky enough to find someone to sublet his space. He is currently running his business out of an executive suite a mile from his old home office: "I'm renting two months at a time and I know my office will grow and change with my business, not vice-versa."
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