What Percentage of Revenue Should the Lease or Rent Be for a Small Cafe Style Food Business?
Any small-business startup faces formidable obstacles, but restaurants can be especially chancy. They're subject to a host of safety and sanitation regulations, vulnerable to downturns in the economy and market their services to a notoriously fickle public. It's also an industry that runs on extremely slender profit margins, so success relies in large part on tight control of expenses. Labor and food costs can be managed, but excessive lease payments can bleed the life from your cafe business.
In almost any restaurant, labor and food cost represent the two largest expenses, each typically accounting for up to one-third of revenues. Your lease payments must come out of the remaining third, along with taxes and fees, lease or amortization costs of your equipment, advertising and all your other costs. To have a fighting chance at profitability, few restaurants or cafes can afford lease costs exceeding 6 to 8 percent of total sales. For example, if your business plan calls for $500,000 in sales your lease should ideally be $30,000 per year or $2500 per month.
If your cafe is a startup, it might take some time before your revenues stabilize at a viable level. Some landlords will work with you to negotiate a lease payment based on your sales. Leases under this structure set a base payment, which must be made every month. Once your revenues pass a negotiated level, you pay a portion of your sales to the landlord. This keeps your costs down while you're establishing a clientele, and provides some protection against downturns in the local economy. Your landlord benefits by making additional profit in good years, and by nurturing and maintaining a stable tenant in down years. Remember to keep your maximum payments below 8 percent of revenues.
It's important to also recognize that the basic lease costs are only a starting point, and that there are many related expenses that must be identified and dealt with in your lease. For example, many properties require all tenants to pay a share of common area costs, such as cleaning staff in a mall setting or parking and snow clearing in an outdoor setting. Your lease must also clearly indicate whether you or your landlord bear responsibility for maintenance and upgrades to the HVAC system and any other infrastructure in the building. The combination of your lease and these other costs is your total cost of occupancy, and should be no higher than 10 to 11 percent of revenues.
In some cases, it might be possible to pay above-average lease costs and still operate profitably. For example, if your cafe combines a low-cost, high-margin menu with relatively low staffing costs, those savings can offset a costly lease. Similarly, venues that can guarantee a high volume of business -- a major theme park, for example, or the only food outlet in a large area -- can reasonably expect to charge a premium for their space. In the first case you still profit by saving elsewhere, and in the second your sales volume is high enough to keep even an exorbitant lease payment within a reasonable percentage of sales.