The Benefits of Leasing Turn Key Locations
Although the bar and restaurant industry can be a lucrative business, it is also a fairly risky business for many people. Statistically, around 23% fail in the first year, with half that in the second, and a smaller fraction in the third year. The biggest issue by far for a start up business is funding. Being underfunded will not allow you the cushion needed to build a steady clientele. As many have written already, you should not expect your business to start turning a profit for the first few years unless you are an established restaurant or bar. To help with the success rate of your business, look first to taking over an old bar or restaurant.
What is a Turn Key Location? Turn key locations are locations that someone previously occupied that have things set up already. They are restaurants that have gone under and have not been able to pay their lease. Some times, the company that has gone under has sold their equipment to try to make some money back before telling their property manager that their company is going belly up. Other times though, property managers have locked the doors on the place because they are owed back rent, or the person has just jumped on their lease. This leaves you with the opportunity to sign a lease and obtain this equipment. Typically, this is a negotiable part of a lease. The property managers don’t really want the equipment, and don’t want the hassle of selling it. There are two things that could happen here. First, they could offer the equipment to you and finance it over the duration of your lease, or you could purchase it outright off the bat. The second is the possibility of them still owning the equipment, but you get use of the equipment through leasing the building. The latter possibility is far more rare, but can happen if you plan to sign for a long period of time, and you negotiate how depreciation works (you would have to pay for repairs of equipment, and if you eventually close that location for whatever reason, they would have a list of equipment you would need to leave).
The benefits of turn key locations are you can save you time, money, start up costs, and in the end, could save your business. In this bad economy, businesses go under for a number of reasons. If you are looking for a location, have done your research on the area (demographics, foot traffic, etc.), and are interested in a location that was closed down, analyze what may have caused the demise of the location. As I had mentioned, it is likely that they were not properly funded to last until the restaurant started turning a profit. Another reason could be that they poorly negotiated a lease in a good economy and with a dip in sales, they may have had successful traffic, but the lease was too high to turn a profit. They may have also had issues with taxes, health boards, or liquor licenses causing the place to shut down. Do your research to find out. It will bring you peace of mind if you find out that they had an extremely high lease that they negotiated, or they got their license revoked for selling to minors or something. This means that it may be a good location, but the way they ran the business was an issue. If they closed down because the location was not selling much, it changes your thoughts on the location, but your research should tell you if it is a good location or not.
Taking over a bar or restaurant can save you a ton on renovations and equipment. Typically, you can negotiate price of equipment with a property manager. If you are getting into the restaurant or bar industry, you should definitely know pricing of equipment better than the property manager. Speak with the property manager, take a tour, get a list of equipment, get price on the lease and equipment. After that, do your homework, calculate the pricing, and counter their offer based on your numbers.
To give you an example, I helped a friend of mine open a bar in Arizona at one point. We wanted to move locations to a better, higher traffic location. There was a place that did not pay their taxes and jumped on their lease. We swooped in and negotiate with the property manger. The turn key establishment was a small location (120 person capacity by AZ fire Standards) and had a full industrial kitchen set up, full bar, bathrooms, patio furniture, ice machine, walk in cooler, keg cooler, and more. It had everything we needed. We were on a very tight budget for reasons I will not get into here.
The typical lease from owners in the area was ranging from $9k to $12k for a place of that size. This was just after 2008 when the economy went south, so there were businesses with leases that high and traffic had gone down significantly. We approached the property managers and they gave us the initial cost a little under the average for the area $8500 and they were throwing in the equipment for us to use, with the option to buy. We did our research, looked at drink prices around the area, then calculated our sales. With the pricing of drinks, and our size, $8500 would be a stretch for our area if we wanted to make money. We negotiated down.
One key piece of leverage we had was our liquor license. We had a primary liquor license so we did not need to worry about a food sale to liquor sale ratio. We were on the main strip on the ASU campus, so this was key, because many companies could not hit their ratio of food sales to liquor sales, and ended up forfeiting their licenses. Having the license, we could negotiate the fact that we will not have the risk of losing our license because of food ratio issues. We also negotiated a tiered lease. We started our first few months at $4500, then the lease went up to $6600. We were also required to submit our yearly sales to them through our POS and if we hit a specific goal our lease would go up the following year to $8300 monthly. This tiered negotiation, though a little complicated, had us working with the property management. If we were in competition, we would likely have lost the bid, but it was a buyers market so we got a great deal. What this did for us though, is let us gradually build our business which raised our success rate significantly.
After the lease was settled, we had the equipment needed, the structure of the bar was in place, and we had some furniture as well. We did some basic cosmetic renovations (Paint, refinishing, cleaning, re-plumbing of the bar, lighting, etc. ) and we were well on our way.
