“Clarity precedes success.”
— Robin Sharma, leadership expert
Many people have great ideas for businesses! A consulting firm to help small businesses be more productive, a clothing boutique for kids, a salon with specialty treats for pets. And the list goes on. These entrepreneurs envision a niche based on their personal experiences, expertise, or passions, and they put their own spin on providing that good or service.
Yet it never ceases to amaze me how so many of these great idea generators start taking tactical action steps attempting to make those ideas a reality with only a general concept in mind. They have no idea who their target audience might be, no plan for marketing or revenue generation, no preliminary budgets for costs of goods or delivery of services, and often times no idea how to run a business. Basically, they are so excited they jump off the cliff without a parachute!
I fielded a call from one such entrepreneur, a successful technology software leader by day and a wine and beer enthusiast by night who wanted to do something with his passion for cocktails. He had no concept of what it would take to start a business much less the amount of work and commitment he’d need. He embraced the “build it and they will come” philosophy. So much so that when he called me he had already identified a location for his bottle shop/bar and was deep in negotiations with the landlord’s broker to lease the space.
So why did he call me you ask? He needed assistance. He needed representation. Which means, he needed clarity.
This entrepreneur had jumped off the cliff and was now looking for a parachute to ensure a successful landing! Among many things, he did not understand why his lease negotiations had stalled, why the landlord wanted to see a business plan and his personal financials, and why he and his spouse were being asked for a personal guaranty on a commercial lease for a new business.
You see, commercial real estate is an investment for landlords and they are looking for a return on that investment. To reduce the risk of getting a non-paying or troublesome tenant, they will scrutinize each and every potential tenant whether that tenant has been in business for five minutes or five years.
Start-ups must prove themselves and their business concepts to landlords. This means having a solid business plan often outlining multiple years that include among other things an operating budget with projected revenues along with a detailed marketing plan to achieve those revenues, and the leadership team with experience and expertise to make it happen. Without a complete and thorough business plan that demonstrates the research and forethought necessary, the landlord only has the prospective tenant’s word and that just doesn’t cut it in today’s world.
Additionally, landlords want to understand how the new business is funded. If entrepreneurs are using their entire savings to fund the business, there isn’t much left in the coffers for rent should the business not perform to expectations. Whether a start-up or not, prospective tenants must prove their financial credibility which means providing tax returns for the last couple of years. For new companies with little to no tax history, this means the business owner providing their personal financial information.
Based on the creditworthiness of the prospective tenant and the risk tolerance of the landlord, a personal guarantee may be required of the prospective tenant. In these situations, typically the prospective tenant business owner agrees to personally be financially responsible for the lease should the business entity fail to pay its rent. If the business owner is married, his/her spouse will often be asked to sign the guarantee as well to avoid the possibility of any legal maneuvering to shift all assets from the business owner’s name to the spouse.
As you can see from this story, the commercial real estate world is very different and can be very cloudy, even to experienced leaders. That’s one of the many reasons why it is so important to have professional tenant representation who can bring clarity.
And that’s what I did for my bottle shop entrepreneur…I helped him gain the clarity that he needed, complete the tasks that were required, and better negotiate the finer aspects of this lease including a burn-off of the personal guarantee. My bottle shop entrepreneur went on to build a very successful bottle shop/bar business which he later sold for a significant return so he could start his next venture.
As Robin Sharma, a leadership expert has been quoted as saying, “Clarity precedes success.” At Phoenix, we want our clients to be successful. That’s why we bring clarity to the cloudy commercial real estate world.