Article

Secrets to successful restaurant site selection

Tour prospective sites in order from worst to best, which will allow you to become more confident, ask better questions and be more in control of the leasing process.

December 1, 2014

By Dale Willerton and Jeff Grandfield, The Lease Coach

The No. 1 reason for the failure or poor performance of a restaurant is poor location. A poor location ultimately results from poor site selection. How else can you explain that identical restaurants from the same chain or franchise system will vary as much as 200 percent in sales volumes?

Of course you will need to factor in size, marketing budgets, management and so on; however, these are all secondary to the importance of location.

Essentially, there are three types of restaurant businesses: profitable, break-even and go-broke. A truly profitable restaurant location will make money and the business will appreciate in value. A break-even location will pay the owner a small salary and pay the rent but not much more. The go-broke location that comes to our mind was a restaurant. This unfortunate tenant remained opened for only three months. Despite our warnings that this was a go-broke location, the business owners poured in $80,000 into their setup and couldn’t pay their rent by the second month of operation. Usually, a go-broke location will not only steal your capital but also put you into personal bankruptcy - after you have maxxed out your personal credit.

If you thought that site selection for your restaurant was all about location – location – location, you’re right … intellectually. However, when restaurant tenants are involved in the site selection process, good old common sense often goes out the window. Consider for a moment that site selection is not a science, it’s an art – part research, part luck and part timing.

Here are five tips on how to best navigate this process: 

• Allow enough time so that you’re not making decisions under pressure. Typically, for a new restaurant business, you should start the site selection process six months or more in advance of when you want to open. If you find a prime location, usually the landlord will hold it for you for a few months. However, if the process takes longer, you may need several months to finalize the Offer to Lease, review the formal lease documents and/or build out the premises.
• Don’t let an agent show you space all over town. Restaurant tenants often fail to realize that real estate agents/brokers typically work for landlords who pay them a commission on lease deals signed and closed. When one agent shows you another agent’s listings, this will effectively create commission-splitting between the property’s listing agent and the leasing agent. This will also undermine your negotiating power since the real estate agent will know how you feel about every location. An agent may be very helpful in pointing out a location you were unaware of, but remember who they are working for. While their advice may be sincere, it may be sincerely wrong.
• Make your leasing inquiry by calling the “For Lease” number on the property sign. This way, you will meet and negotiate with the listing agent directly. Tour prospective sites in order from worst to best. This way, you will become more confident, ask better questions and be more in control of the leasing process.
• Don’t telegraph your intentions by giving buying signals. Ask the listing agent to e-mail you preliminary information before you agree to view the space. When viewing, stifle the urge to think out loud; subtle comments to a partner/spouse and overheard by the leasing representative can work against you. If you’re asked how much you have budgeted for rental payments, remain vague. Not every question asked deserves an answer – not yet, anyway.
• Negotiating on multiple locations: When it comes to site selection, it’s critical to pick multiple locations during the process and negotiate on them simultaneously. Even if you love one location, at The Lease Coach we like to introduce decoy locations to create competition for the tenancy.
• Scrutinizing burned locations: In the restaurant industry, it’s very common for one restaurant to open where another has failed – mainly to utilize the existing infrastructure (e.g. mechanical,, electrical, washrooms, kitchen, hood, etc.). If you are the third restaurant taking over the location, however, there may be more wrong with it than you can see. These are called “burned” locations.

On a final note, also remember that landlords sometimes prefer to lease their worst space(s) first and save the best space(s) for last. If you locate your restaurant within a shopping centre or strip mall, understand that, usually, the individual unit or location you lease within the property is more important than the mall itself – or at least equally important. Know that lease rates within a building can vary two to three times depending on unit desirability, walk or drive-by traffic flow, space shape, quality of neighbouring tenants, anchor tenants and your operating status as an independent or a national chain name. While you don’t always get what you pay for in leasing commercial space, you normally don’t get more than you pay for either.

Note that if you already own a restaurant business but are considering relocating when your current lease expires, start your site selection at least 12 months ahead. If you cannot get a satisfactory lease renewal, you will need this time to select alternative sites and negotiate a new lease elsewhere.

Dale Willerton and Jeff Grandfield - The Lease Coach are commercial lease consultants, professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). For more information, e-mail DaleWillerton@TheLeaseCoach.com or visit TheLeaseCoach.com.

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