Yes it seems attractive to buy a shop in a shopping centre where you’ll receive a steady stream of customers (or lookers). There’s a few negatives to go along with the positives:
- Lease Term – unless you have rights of renewal (such as 3 years+3 years+3 years) on top of your initial 5 year term, you’ve got a problem. Your bank will expect you to pay off your full loan during your lease term, which may mean zero cash for you!
- Lease Transfer – unless you can transfer / assign the lease to another person your business may be very difficult to sell. Even when you can do so, the shopping centre may impose significant roadblocks to the approval of the new owner, meaning the prospective buyer will possibly give up and buy a business where the lease transfer is easier
- Shop Fitout Costs – your lease will normally require you to refit your shop every 3-4 years, and sometimes will even specify which shop fitout company to use. And a new fitout will often cost $150,000 or more (I’ve seen owners hit for over $200,000 fitout costs every 3 years) – that’s all money out of your back pocket. Much of your profit has to be re-invested on replacing shop fittings that, in a normal business, are perfectly fine and usable.
- Advertising Costs – you’ll be required to pay for all those shoppers or lookers, that’s not free! In addition to your monthly rental, you’ll also pay an advertising levy and often also a % of your revenue. That % revenue taken by the shopping centre can easily exceed 8%, sometimes as high as 15%! Is there a better (and less expensive) way to drive customers to your business?
- Franchises in Shopping Centres – that’s seems like the worst combination you could ever have. Not only could your lease not be renewed at the whim of the shopping centre, but your franchise agreement may also not be renewed. Combine that with franchise fees that may exceed 10% (including the franchisors advertising levy) and the shopping centre taking an unhealthy cut of your revenue and guess what – 20%+ of your revenue has immediately been taken before it even hits your back pocket.
BUT there can also be a lot of positives to buying a business in a shopping centre including:
- Heaps of foot traffic – people who are there to buy
- Shared advertising costs – may be lower than attracting customers to a standalone shop
- Located near complimentary businesses
If you’re considering whether of not to buy a shop, contact Martin Dabb on 0458 290 100 or email me and I’ll review the business for you and help you to compare it with businesses which aren’t in shopping centres.