Leases
Rent Creep Can Kill Business Value
Rent is a major expense for small businesses, particularly those owner-operated businesses. Rent and the calculation of rent increases are in property leases. Sadly, many have fixed increases that can have a direct impact on the value and salability of the tenant business.
The key consideration must be the physical nature of the leased premises. The reality is that a business will reach, often has reached, the maximum space it needs to efficiently generate revenue (sales). For example, there is only a certain amount of stock that can be held in a retail shop. The growth of its revenue is limited by the physical size of the premises it leases. Its revenue growth is realistically more likely to reflect the inflation rate once it has reached its maximum revenue capacity.
Leases often have fixed annual increases of 4% or more in the base rent, well above the inflation rate. Over a 5 year period, this can increase the base rent by some 17%. At the same time, assuming an inflation rate of 2%, the revenue growth is likely to be limited to only about 8%. The tenant businesses profit is reduced. The value of the tenant’s business decreases, often to the point it becomes unsaleable. When outgoings and other lease expenses are considered, the outcome is often worse. The Landlord’s leasing business, on the other hand, is likely to have increased in value and saleability.
Small business owners would do well to calculate out the total rent over each period of the lease before entering into it. It will impact their business value and saleability
Need more information, talk to me.
Graham Long
Kevin Lovewell
M: 0401 308 385
E: Click here to contact Kevin Lovewell
Member & Registered Business Valuer
Australian Institute of Business Brokers
Graham Long
M: 0428 649 791
E: Click here to contact Graham Long
Member & Registered Business Valuer
Australian Institute of Business Brokers
