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Rent Percentage of Gross Sales

6/5/17       
Jeff

I am in the process of negotiating the purchase of an established wood working business. Part of the deal is determining the rent.

I have been informed that most businesses try to pay around 10% of gross sales on rent.

Does this hold true for the wood working industry?

6/5/17       #2: Rent Percentage of Gross Sales ...
Bill

I am not sure that has anything to do with what you pay? I would think a starting point would be what space of that nature is going for locally.

The cost in NY is not going to match the cost down south for example.

I would then think that the cost you pay should be less than the local market because you are buying the business. If there is owner financing (I hope there is some if not all owner financing) they are vested in your success and a high rent will lessen the odds of your success.

Good luck.

6/5/17       #3: Rent Percentage of Gross Sales ...
Jeff

If annual rent is $36,000 and gross sales are $250,000 Can business survive, regardless of location?

6/5/17       #4: Rent Percentage of Gross Sales ...
Paul Downs

Depends on what the other expenses look like. 10% would be an upper limit for me, and we're currently closer to 4%.

36k means nothing by itself. Where is it? How many square feet? What kind of space is it? What are comparable spaces or better spaces going for in that location? How tied to that location is the business?

If you are purchasing, first thing to focus on is profits. Are there any? How much? Can they be grown? What else could you do with your money to make that rate of return? Or are you just purchasing a job?

6/5/17       #5: Rent Percentage of Gross Sales ...
Jeff

I am working with a consultant who is employed by the small business center in my state. I am wood worker not a business expert. I understand your questions and they are good and justified. That said, he ask me if I could see if there was an industry average.

I can see now this post is going to ask more questions then it is going to answer.

6/5/17       #6: Rent Percentage of Gross Sales ...
Larry

Triple net leases are common but not in all areas. So watch for the terms.

6/5/17       #7: Rent Percentage of Gross Sales ...
Alan F.

Our rent is less than 3% of the gross; in 2009 is was about 8% because of the drop in sales.

6/5/17       #8: Rent Percentage of Gross Sales ...
Luke

I would contact a local real estate agent and ask for comparable rent prices in the area.

6/5/17       #9: Rent Percentage of Gross Sales ...
Pat Gilbert

The accountants will tell you 5% or less.

6/5/17       #10: Rent Percentage of Gross Sales ...
Jeff

Alan and Pat,

Thank you,
Jeff

6/5/17       #11: Rent Percentage of Gross Sales ...
Peter Sandoval

Website: http://carpentryassociates.com

Our rent is currently running 1.95% of sales in a 13,000 s.f. plant in Texas. The AWI cost of doing business survey shows that the average is about 1.5%

6/6/17       #12: Rent Percentage of Gross Sales ...
Steve

So if you stop selling, do you get to stay there for free?

The two shouldn't be connected contractually as they aren't really related. Commercial property will/should be valued based on the overall property market where the building is located based on supply/demand/condition.

6/6/17       #13: Rent Percentage of Gross Sales ...
Jeff

Peter,
Thank you.

Steve,
What % is your rent of gross sales?

Geoff

6/6/17       #14: Rent Percentage of Gross Sales ...
Alan F.

The only time you see rent tied to sales is in retail stores in malls, where its triple net plus a % of the gross

6/6/17       #15: Rent Percentage of Gross Sales ...
Steve

1.04%, but my rent is fixed and my sales are continuing to grow.

The other problem you could have is unprofitable sales. Just because you have sales doesn't mean you can sustain a higher cost.

It sounds like it might be the guy selling the business that owns the building and he's looking to continue to get a piece of the action? Continued revenue stream for a business sale isn't uncommon, but it needs to be tied to some type of performance based on the seller's continued contribution.

6/6/17       #16: Rent Percentage of Gross Sales ...
Matt Calnen

Jeff, my rent is 3% and my gross is close to yours. My space is 1200 square feet in a good location. Hope that helps

6/11/17       #17: Rent Percentage of Gross Sales ...
cabinetmaker

we are @ 5% and getting lower each year, although our rent continues to climb for inflation

If I might, you must consider the actual potential of the business and the actual present heartbeat of it currently.

There is a time to look @ the square footage and determine is this a hindrance or a blessing. Lean principles can help you get all potential out of the building

Don't pay for percentage, this is not healthy in a manufacturing facility

As always, do your research

If you are looking @ a triple net lease, you need to get all upgrades and maint needs taken care of in writing before signing on the dotted line. Also, get in writing, the actual request of the owner of in insurance you need to provide for them, vs what you need for you and your completed goods

6/16/17       #18: Rent Percentage of Gross Sales ...
Larry

A little less than 4%. I suspect what you get for your rent varies a lot. Ours includes: 5 OH doors, 2 loading docks, 80' clear span, 18' side walls, paved parking, sprinklers, 800amp 3 phase.

8/24/17       #19: Rent Percentage of Gross Sales ...
David Waldmann Member

Website: vermonthardwoods.com

I agree with those that say paying a percentage of sales is not a good way to go. I'm not sure if you were saying that was the proposal, or if the amount being asked happened to coincide with 10%.

I own our property through an LLC and lease it (triple net) to the company at an amount that comes out to 3% of sales. The amount was determined by talking to our local regional development board guy to get a market value.

Part of what the value is, is access, building configuration and level of retail presence. Take just one of those variables, a run down place in the woods that has all the space, access, working conditions, etc is going to have a lower market value than a place between the Porsche and Mercedes dealer. The question is whether you can justify spending the extra money as part of your advertising budget to get eyeballs, and "assurance" for prospective customers that you are a smart, trustworthy "real" business and not some fly-by-night that will be gone with their deposit.

Remember the three most important factors in real estate value: location, location and ummm, oh yeah - location. But also don't forget that what matters about that location differs per user. What's valuable to you may not be to someone else and vice versa.


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