Is there a benchline for how much a business owner should pay in rent vs. his/her gross profit?
Join us at Entrepreneur magazine's Growth Conference, Dec. 15 in Long Beach, Calif. for a day of fresh ideas, business mentoring and networking. Register here for exclusive pricing, available only for a limited time.Not really ... profit is a function of output, and rent overhead is also dependent on whether a company is a business-to-business (B-to-B) firm or a retail/business-to-consumer (B-to-C) company
Obviously, a consultant could generate huge fees, have a high profit margin and a low rental overhead, because he or she wouldn't need a huge amount of space. Adding team members would justify a higher rent or more overhead only if the revenue generated by those team members could cover that overhead, and keep margins high
On the retail side, profit as a percentage of square footage is dependent on sales. Can you sell high volumes in a small storefront? Some retailers can and do. Can rental on a large warehouse space eat into profits? Absolutely. It is all a matter of what your numbers are--which is an exercise in itself. But it's an exercise that will give you great insight into how much you can spend in overhead and how much profit you'll need to survive.
One more thing. It's typically better to find a way to own your space, if possible. Then, if it's a big space, you can look to sublease. Many owners can retire from the capital appreciation on the land underneath their shops--which has grown in value faster than the businesses themselves
All the best -- Brad Sugars.
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