Rent Negotiations: Tips For Getting The Best Deal!

By Kelly Cunningham

Rent on Commercial Leases. How much should I pay? As a regular part of the work we do, at Your Leasing Co, in representing Tenants in their commercial leasing matters and in getting to know our clients, one of the most common questions we are asked is “How much rent should I be paying”?

Rent is one of the most important things to negotiate in any commercial Lease and so it is important that you understand all of the elements and considerations that make up a fair rent negotiation, to ensure you are doing the best by your business and maximising your profit.

What is market rent?

A market rent is defined by what the tenancy would be worth if it was vacant. If your tenancy was unimproved and available to the market, what would the Landlord be seeking in rent from a new Tenant? Once you know this, you know the market rent.

Next question then is … how do I find out what that is?

There are a number of ways to establish this, but the best way is to compare your premises to others that are available on the market today and see what they are renting for or find out about recent deals done in your area. We can help with this!

Once I know this, does my Landlord, then have to agree to this?

No, the Landlord is allowed to make their own determinations when it comes to the rent for their property, but it is certainly helpful in your negotiations to be able to provide some comparables to the Landlord to show why you think your rent should be at a certain level.

Remember, the market rent is what your tenancy would be worth, if it was unimproved and available to the market. Your existing tenancy is neither of those things exactly, as it is fitted out (so not “unimproved”) and is occupied by you, an existing business (not “available to the market”), so the market rent is really just an indicator to get you started.

You will then need to work out what kind of premium on top of the market rent, is fair, to compensate for the fitted out premises and existing business elements.

Wont the Landlord propose the market rent?

The Landlord will propose a rent which will generally be an increase on your existing rent. This may or may not have a relationship to the market rent indicators. Landlords are always looking for growth on their assets, so their ideal position is nearly always an increase.

Remember, the rent you are paying now is only the rent, because you agreed to an amount 5 years ago, when you entered the Lease and that amount has increased annually by 3,4 or 5% or CPI, to bring the rent to what it is today. The rent today is based on a calculation determined 5 years ago, not what is going on in the market today.

Often, these two numbers are very different. KEY TIP: USE THE MARKET RENT AS YOUR STARTING POINT FOR A NEGOTIATION, NOT THE LANDLORDS ASKING RENT.

Tenants often make the mistake of negotiating their position from the Landlords asking rent, rather than the market rent indicators, meaning that if they save $10,000 on the Landlords asking rent, they feel really pleased with the outcome, but what if the market rent is $30,000 less?

What is percentage rent or turnover rent?

Percentage Rent or Turnover Rent is most often seen in shopping centre leases. This is where the Landlord gains access to your sales figures and then at the end of the year, calculates whether you should pay them more rent based on your sales.

If you are paying a fair market rental, then have a percentage rent provision in your Lease as well, this may mean that if you perform well, you are penalised by the Landlord and will end up paying more than what is fair for the actual real estate.

Percentage rent is a great tool, however, if you are unsure of how the business will perform. It means that the amount of rent you pay is tied directly to the business performance. If sales are low, then so is the rent, however, if sales are high, then the rent can be too. It is important to just work out a percentage that you think is fair.

KEY TIP: KEEP THE PERCENTAGE LOW, SO THAT THE THRESHOLD FOR PAYING “PERCENTAGE RENT” KICKING IN, IS HIGHER THAN THE MAXIMUM SALES YOU THINK YOU COULD ACHIEVE IN ANY ONE YEAR.

What is gross rent?

Gross rent is when the rental payments you make to the Landlord include the common outgoings for the property. Most leases include an element of net rent (profit centre for the Landlord) and then a contribution to the common property outgoings, for things like common cleaning, security, council rates, insurance etc (a direct recovery of actual costs).

These operating costs can go up and down quite dramatically and if your Lease is a NET Lease, with rent and outgoings calculated separately, rather than a GROSS Lease, then you will pay your outgoings contribution to the Landlord annually and this will move up and down, as expenses move up and down.

If you have a GROSS Lease with gross rent payable, then you will pay a fixed amount per month and this will just increase annually by an agreed rent review amount, often 3,4 or 5% and this will happen, irrespective of the changes to the costs involved in operating the property.

KEY TIP: OPT FOR A GROSS LEASE WHERE POSSIBLE

If you have any questions about negotiating the best outcome for your next Lease, please call us for a free, no obligation conversation on 1300 356 702.

By David Watts

Unfortunately, what I see a lot is misdiagnosis when it comes to business challenges. Success doesn’t come from knowing your numbers, it’s about understanding the story they tell so you can stop leaving money on the table.

If your business decisions seem to be draining your bank account instead of filling it, there might be undiagnosed issues at play. When you start uncovering opportunities that can boost your bottom line the magic starts to happen.

When profits are optimised, navigating the complexities of salonpreneurship becomes more straightforward and less stressful.

The journey to greater profits in your salon begins with recognising and rectifying the common misdiagnoses, accepting that understanding your numbers is a superpower you need to develop, and making business decisions that fuel growth, not hinder it.

The true power of profit:

It is not just about financial gain; profit is the bridge to personal freedom. When your business is truly profitable, it becomes the vehicle for the life you desire, not a source of stress.

Financial freedom offers the ability to build a life that resonates with your personal values and dreams, set your own schedule and to pursue your passions outside of work.

Psychologically, the shift from financial strain is empowering. You feel more in control, your overall well-being levels up, and work becomes a source of joy, creativity, and personal growth.

Profitability in the salon is also important for the well-being of your team members. It provides the opportunity for self-improvement and personal development, the chance for skill enhancement, and the security to explore their professional potential. As financial worries diminish, you and your team can invest more energy into honing your craft and finding fulfilment in your roles.

Why it matters for business longevity:

Profit plays a crucial role in ensuring the longevity and sustainability of a business. It serves as the lifeblood that fuels growth, resilience, and adaptability. Salons that consistently generate profit are better equipped to withstand the test of time. These salons are able to invest in growth, navigate challenges, attract top talent, and importantly service their clients better.

In business we need a buffer against economic downturns or unexpected challenges. Building profit into your salon will serve as a financial cushion, helping weather unforeseen circumstances without the wheels falling off.

Team members are more likely to stay committed to a salon that demonstrates stability and growth. They also find it easier to attract top new talent by offering competitive salaries, benefits, and professional development opportunities. A skilled and motivated workforce is a secret to long-term success.

Long-term client relationships contribute significantly to your revenue. Profit allows salons to invest in delivering high-quality products and services. Satisfied clients are more likely to be loyal and advocates for the brand.

Debt is one of the biggest challenges I see impacting salons’ bottom lines, it is crippling to cash flow. Profitability provides the money to pay off debts, reducing financial liabilities and interest expenses. A salon with lower (or no) debt is better positioned to succeed long term.

The profitable strategy for business freedom:

When working with salon owners to diagnose financial issues we are effectively looking for which profit levers to pull. I think that salon owners should be generating 30% profit and accepting anything less is short changing themselves and the business.

How you approach the numbers will determine what lever to pull…

You can analyse your fixed expenses and ensure they are sustainable; they can blow out and impact your profitability quickly. If you ask your accountant, they will generally tell you to cut expenses, it is how their brains are wired.

However, as a strategy it ignores the commercial reality of investing in valuable business activities like marketing or coaching. The true diagnosis would be to check the return on investment from your marketing or coaching as turning that tap off could have a detrimental effect on your profit.

There are some quick wins to be found in your bank statements generally; forgotten or unnecessary subscriptions, old insurances still active or finding other hidden expenses you have long forgotten are all things you can tidy up and save money on but in reality, your fixed expenses are just that, fixed.

To improve your ratios around fixed expenses you can generally only increase your sales. This strategy often creates more headaches and is an all too familiar story across our industry.

Many salon owners run into more trouble as their sales increase, they don’t have more money in the bank, in fact they often have less, and this is because their menus are not priced for profit.

Pricing is impacted by your variable costs like wages and cost of goods, yet these are often ignored when it comes to setting up our service menus. There are too many salons that have guessed the price of services or used the market as a guide.

Even your best performing team member cannot outperform a low profit menu!

You can analyse performance, utilisation, and many other metrics in your salon but if you ignore the price you charge for your services you are likely to misdiagnose your problem and focus your efforts in the wrong place entirely.

It’s also not enough to say that you will raise your prices by a particular percentage, you actually need to do the work to know what it costs to perform EVERY service on your menu and build your profit into the pricing.

Honestly, this is a time-consuming task, but it is well worth it. You will need to measure usage and amounts of products and guessing or estimating here won’t work. You need to base this on how your salon operates and not what the supplier may suggest you are using.

Now for the reality check, you will probably need to rip the band aid off and execute on implementing your new prices. Your financial future depends on it.

The fear of client backlash often looms large when contemplating price increases. However, the prevailing wisdom that “no one will notice your price increase” holds a powerful truth. The majority of your clients won’t even blink.

For you and your team it’s not just about adjusting numbers on a menu; it’s about ensuring you provide your clients absolute value that aligns with your newfound pricing. Clients accept price increases when they identify a corresponding increase in the value they receive. It’s not just a financial transaction, it’s their conscious choice to invest in an experience.

Strategic Profit Mastery:

Strategic pricing involves a multitude of decisions. It’s about recognising the unique value you bring and balancing your pricing structure with the perceived worth of your services. This strategic dance ensures not only financial gain but a profound impact on the health and longevity of your salon.

Reach out to us at Freedom Mastery and we can talk about tools you can use to assist you in nailing your profit and pricing. My DMs are full of salon owners who are seeking to not only make money but creating the life they have always envisioned simplicity in business life.

David. XoX

Head of Coaching at Freedom Mastery, David has a diverse background in sales, marketing and operations and is passionate about improving the professionalism of the industry. Contact David via email david@freedommastery.com.au or DM on Instagram @davidwatts_freedomcreator