The number one reason for business failure or negative
performance is a poor location. A poor location ultimately results
from poor site selection. Consider that identical stores from the
same chain or even similar stores within the same industry will
vary as much as 200% in volume of sales annually; the primary
difference would be location. Other factors include store size,
marketing budgets, management and so on, but these are secondary to
the importance of location.
Essentially there are three types of locations:
Profitable, Break-even and Go-broke:
- A truly profitable location will make money and the
business will appreciate in value.
- A break-even location will pay the owner a small salary
and pay the rent but not much more.
- The go-broke location demands the owner continually pour
more money in to survive. The example that comes to mind lasted
less than three months from opening to closing for one unfortunate
tenant. Despite my warnings that this was a go-broke
location, the business owners spent over $80,000 into their
store setup and, by the second month of operation. couldn’t pay
their rent. Usually a go-broke location will not only steal
your capital but put you into personal bankruptcy, after you’ve
maxed out your credit and second-mortgaged your home.
If you thought site selection was all about Location –
Location – Location you’re right … intellectually. However,
when tenants are involved in the site selection process, good old
common sense often goes out the window. Consider for a moment that
site selection is not a science; it’s an art, part research, part
luck, part timing and many other ingredients combined. For example,
is the best time to do site selection is before or after you commit
yourself to opening a business? If it sounds too obvious don’t be
fooled; most tenants do their site selection after –
not before – committing themselves to a business opportunity. One
such case involved a retailer who began receiving seasonal spring
inventory for a new store but he hadn’t finished picking the
location for the store or negotiating the terms yet. Consequently,
this entrepreneur compromised on the location and on the best deal
he could have made … just to finally get open.
In my book, NEGOTIATE YOUR COMMERCIAL LEASE, I’ve
dedicated an entire chapter to site selection. Here are some
topical tips from the expert:
- Allow enough time so that you’re not making decisions under
pressure. Typically, for a new business you should start the
site selection process six months in advance of when you wish to
open. If you find a really hot location, usually the landlord will
hold it for you for a few months. However, if the process takes
longer you may need several months to finalize the Offer to Lease,
review the formal lease documents and build out the store.
- Don’t let a realtor/agent (who represents landlords) show
you space all over town. In this industry, there are agents who
list the property and other agents who lease the property; however,
there is only one commission paid by the landlord. When listing
agents both list and lease the property, they will gain as much
commission as possible. The commission pie, however, is only so
big. When an outside agent introduces you as a potential tenant,
the listing agent faces accepting less of the landlord’s commission
… therefore, he/she becomes considerably less motivated to do the
deal with you preferring to find his/her own tenant to lease the
space – thereby earning all of the commission.
Additionally, doing this will also undermine your negotiating power
since the real estate agent will know how you feel about every
location. A realtor may be helpful in pointing out a location you
were unaware of but remember he/she is working for the landlord who
will ultimately pay a commission. While an agent’s advice may sound
sincere, it may be sincerely wrong.
- Make your leasing inquiry by calling the For Lease number on
the property or on the leasing agent’s sign, after you have
finished driving around doing site selection. This way you will
meet and negotiate with, or through, the listing agent directly.
View prospective sites from worst to best. You will become better
at handling yourself and by the time you get to the property you
like the most you ask better questions and gain more control of the
- Don’t telegraph your intentions by giving buying
signals. I recommend that you have the leasing representative
fax or send you some preliminary information in advance before you
agree to view the space. During the viewing, stifle the urge to
think out loud; subtle comments to a partner or spouse overheard by
the landlord’s leasing representative or property manager can work
against you. For example, “This could be my office” or “We’ll need
to change the carpeting …” will indicate your interest in the
property and will work against you when it comes to negotiating the
terms. If you’re asked how much you’ve budgeted for rent payments,
be vague. Not every question asked deserves an answer, not yet
- Never make the first Offer to Lease. The landlord’s
leasing representative, upon your request, will prepare a lease
proposal or an Offer to Lease containing suggested Terms and
Conditions for your tenancy. While this is not a site selection tip
per se, it is an integral part of the site selection process. When
you receive an Offer to Lease first, you will then be nicely
positioned to counteroffer or negotiate the proposal.
- Don’t negotiate on only one location at a time. You can
- and should - create competition for your tenancy; you can do so
by obtaining lease proposals on several different properties
simultaneously. Avoid the tendency to negotiate on one deal at a
time. Negotiating on multiple locations at the same time may be the
single most effective tool you have for creating the best deal.
While one landlord may offer you three months of free rent, the
next may offer four months and so on. By playing one landlord’s
lease proposal against another, you will be negotiating from a
position of strength.
- Do your homework before you start. Get out a map and
mark the boundaries of where you’re willing to open your business.
Use the Yellow Pages to pinpoint locations of competitors and
complimentary tenants that might enhance your business. Talk with
existing tenants in buildings you’ve selected as prospective sites
doing this can provide a wealth of information. Remember that good
preparation is an excellent substitute for novice negotiating
If you find yourself trying to decide between a better location
at a higher rent versus a lesser location for a lower rent my
advice is go for the better location. When I’m consulting to
tenants and doing site selection my job isn’t to find the cheapest
location – it’s to select a site that will help the tenant maximize
sales. Remember that you want to be profitable – not
break-even. It is better to have negotiated poor lease terms on a
good location than a great deal on the wrong location.
When doing site selection, consider that landlords sometimes
prefer to lease their worst space first and save the best for last.
Usually, the individual unit or location you lease within a
shopping centre or strip mall is more important than the mall
itself … or at least equally important. Lease rates can vary two to
three times within the same building depending on the following:
desirability and demand for a particular premises - the time of
year – visibility – walk-by or drive-by traffic flow –
accessibility – frontage – the shape of the space – the quality of
neighboring tenants – anchor tenants – and whether or not you will
be operating as an independent or a national chain name. While you
don’t always get what you pay for in leasing commercial space, you
don’t normally get more than you pay for either.
If you are aware of a great building without vacancies, don’t
despair. By contacting the property manager or leasing
representative you may discover that another tenant’s lease is
about to expire; the tenant may therefore close out or move.
Perhaps a tenant will be leasing month-to-month while the landlord
hopes to find a permanent tenant like you. Don’t rule out the hot
properties just because there are no vacancies. Every building has
tenant turnover sooner or later. Frequently when my client has
wanted to open in a less desirable location (because nothing else
is available) I encourage him/her to wait. We stay in contact with
the landlord and invariably a better location usually becomes
available within a few months. Considering that you will be leasing
that location for a very long time it’s worth the wait.
For some business operations location is absolutely critical and
for others it may be less important. If your business is not
location-dependent then you should have the proverbial upper hand
in your negotiations. This applies more so to office or industrial
If you already own a business but are considering relocating
upon expiry of your current lease, you should start the site
selection process at least nine months in advance or more. The
theory is that if you can’t get a good lease renewal you need
enough time to select alternative sites and negotiate a new lease
elsewhere. Good luck with your site selection.