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25 May 2011,
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How Should I Analyze the Rent Factor Before Proceeding on a Business Purchase?

25 May 2011
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I am currently evaluating whether to purchase a retail sports apparel business within a shopping centre complex. The only thing I’m worried about is that the rent seems to be high and I’m not sure whether this business would be viable to take over considering the amount of rent I’m going to pay each week. It will probably take a lot of sales in order to at least break even. How should I analyze the rent factor before proceeding on a business purchase?

Brad Sugars answers

If the business is an existing one and you are a serious buyer, you should have access to its financials.

Once you see the numbers, you can begin to assess the situation by first asking yourself, at what percentage of sales does the rent run?

My initial feeling without knowing anything about the business in question is that you should be looking at a figure somewhere around 30% if the business is relatively healthy.

If it is higher than that, it’s not the end of the world, but there is some ground to make up.

No matter what the percentage is, once you’ve analyzed it, at least you have a starting point to work from.

From there it will then be up to you to implement strategies to bring your rent into line as a percentage of sales.

There are many things you could do to achieve this and most of these strategies can be found in “Instant Cashflow”.

A high rent can seem intimidating, but on its own doesn’t mean too much. Location has much to do with things and if you’re paying a premium in rent, you may also enjoy a premium position for buyers.

Remember, a busy shopping centre will charge more than a quiet one, but you get more passing trade.

So is the store in a high traffic area? If it is, that high rent may not be as much of a problem as it may first seem. Armed with the financials, you should be able to weigh the pros and cons and make a reasonable decision.

It’s all a question of balance and figuring out the percentage of sales to be paid in rent is a great place to begin your analysis.

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