Not seeing the forest (dollar amount) for the trees (percent)
So I get a phone call from this client of mine last week. Great guy, good restaurateur, successful. His lease is just about up, and he tells me his landlord wants to renegotiate it. The landlord wants to up it by about fifteen percent the first year, then 3% each year thereafter over ten years. The client wants me to figure out what percent of sales his new lease expense would be based on current and projected sales. I know what he’s doing, which is he is zeroing in on a single expense percentage figure. He’s heard that if rent is over X% of sales, then it isn’t a good deal.
While I agree that this is an important factor to consider no matter what the circumstances, I tried to sway him to what I saw as the bigger picture. After all, he’s the restaurant guy, I’m the numbers dork. And the bigger picture was how much this was going to cut into his draws. Because his restaurant does well. He takes home north of six figures each year with relatively minimal involvement. And the bottom line was that the rent increase, despite its relative heft, would perhaps put an additional $7K or so into the landlord’s hands compared with current rent.
Now, seven thousand dollars is a lot of money, except for Puff-Daddy, who drops that on Ciroc each Saturday night. To us dredgers, it is a pretty big chunk-o-change. But . . . compared to what my client takes out of the restaurant, and given that his business has established itself as a pretty solid operator in the market, I suggested to him that as long as he could put his head on the pillow not wondering if he’d be better off trying to sell his business, he would be better off taking the deal.
My client is very good at watching his pennies, and I laud him for that. Too many restaurant owners do not pay enough attention to every expense, and it ultimately hurts them or worse, spells their doom. But in this case, with a popular, entrenched locale, plenty of cash flow, and the hassle of closing shop and selling (not to mention where else to invest the proceeds), the narrowed focus on the new rent being too high of a percent of sales doesn’t work.
