New shop rent expense

[Theta]

New guy here, looking into opening a new repair shop. Been in the industry for 15 years as a tech/manager.

I am looking into a new building/ piece of land to have a shop built on at hard signaled corner with 50K per day traffic count in an affluent neighborhood, over 40K households in a 3 mile radius with average income of $125K per year. Not any high end modern repair shops a 5 mile radius other than a few standard dealerships. Location is really great, or so it seems.

I am pricing out rent/mortgage to be between $36 and $50/sq ft for this shop. Proposed to be 7500 to 10,000 sq ft. The shop/brand we be marketed as an alternative to the luxury dealership, higher end with modern amenities compared to the normal 30 year old never updated repair shop and cater to the performance car community as well.

Plan is to have 4-6 techs with 1-2 writers. I have run numbers through a P&L statement and if the techs produce 8-10 hours per day the numbers work to pay the bills and make a 15-20% net profit.

My question is, is my rent too much? Depending on my labor rate and hours billed, my rent expense is between 15% and 20% of gross revenue. I know I have read and heard that auto repair should be closer to 5-10% but I know that location can affect this greatly along with many other factors.  I know that the number work in my spreadsheet but I want some real world opinions if possible. Maybe someone is in a location or situation like mine and it is working great or maybe it isn't.

Let me have it!

[Theta]

I will add about the location that there is a Starbucks and a Mcdonalds within a block of the proposed location. They both have drive thru's and are busy all day everyday. I know they did their homework about these locations.

The auto repair shops that are in the 3 mile radius are two gas station service stations and 2 older general auto repair shops. The general area is expanding and expanding fast with new town homes, high end luxury homes and luxury apartments, so the area is becoming more expensive and growing fast.

Any insight or help would be appreciated! Thanks

[bantar]

Startups are hard.  We're in a trust business and it'll take a while to build volume.   Your rent will start on day 1, whether or not you are selling hours.    I thought I had more than enough cash to make it and it was dicey for a while. At the end of year 3, is when I went from wondering about success to wondering how to handle increased volume with reasonable turn-around time.  Ignoring mortgage, I broke even in 6 months on operations only, but was managing staffing levels and inventory and tools purchases closely.    I'd say, don't focus on profit.... focus on survival.  Assume the worst and plan for even worse.   Goal #1 is to survive.   Goal #2 is profit.   They say cash-flow is king and they are right.   

I'm on prime property... a very busy intersection in a Neighborhood Market Walmart anchored shopping center (still waiting on it to be built).   This delay killed expected traffic and thus car count.  (BTW, sadly, I didn't plan for this).  In one sense, the increased visibility born by increased building cost is a marketing expense.  Personally, I think it has tremendous value, but....   It helps, but you'd be surprised to know that I have people drive thru my firelane to reach the Walgreens next door and 2-3 years later, they finally realize that I'm here.   We're often invisible until needed.   Maybe when they drive thru my other fire lane to reach the Walmart, they will see me then.... or not.     I too don't see many businesses, etc while I'm driving, but dang, they should take notice of MY business when they are driving, shouldn't they?

I'm also in a wealthy community.   Too much wealth is bad as they can either fix this car or just go buy a new one.    But, on the flip side, everyone in the family has a car or 2. 

And let me finish with a note about my ProForma projections.   They were wildly optimistic.   Yet, I planned them as a pessimist.  As it turns out, I was a lousy pessimist.  I made some bad assumptions.  I missed many big expenses, such as city mandated inspections, fire, water.   But I had to live with the hand I was dealt.   Hope this helps some.

[Theta]

5 hours ago, bantar said:

Startups are hard.  We're in a trust business and it'll take a while to build volume.   Your rent will start on day 1, whether or not you are selling hours.    I thought I had more than enough cash to make it and it was dicey for a while. At the end of year 3, is when I went from wondering about success to wondering how to handle increased volume with reasonable turn-around time.  Ignoring mortgage, I broke even in 6 months on operations only, but was managing staffing levels and inventory and tools purchases closely.    I'd say, don't focus on profit.... focus on survival.  Assume the worst and plan for even worse.   Goal #1 is to survive.   Goal #2 is profit.   They say cash-flow is king and they are right.   

I'm on prime property... a very busy intersection in a Neighborhood Market Walmart anchored shopping center (still waiting on it to be built).   This delay killed expected traffic and thus car count.  (BTW, sadly, I didn't plan for this).  In one sense, the increased visibility born by increased building cost is a marketing expense.  Personally, I think it has tremendous value, but....   It helps, but you'd be surprised to know that I have people drive thru my firelane to reach the Walgreens next door and 2-3 years later, they finally realize that I'm here.   We're often invisible until needed.   Maybe when they drive thru my other fire lane to reach the Walmart, they will see me then.... or not.     I too don't see many businesses, etc while I'm driving, but dang, they should take notice of MY business when they are driving, shouldn't they?

I'm also in a wealthy community.   Too much wealth is bad as they can either fix this car or just go buy a new one.    But, on the flip side, everyone in the family has a car or 2. 

And let me finish with a note about my ProForma projections.   They were wildly optimistic.   Yet, I planned them as a pessimist.  As it turns out, I was a lousy pessimist.  I made some bad assumptions.  I missed many big expenses, such as city mandated inspections, fire, water.   But I had to live with the hand I was dealt.   Hope this helps some.

This is great information. 

I completely understand that this is about trust and getting people in the door will be the biggest challenge, great location or not. Survival is key, that is a good #1 to focus on in the beginning. 

If you don't mind me asking, how many months of expense did you have in the bank and how many did you end up needing? 

I have been quite pessimistic with my projections for my first year and I will take a second look with even more pessimism and see where I come out at. I know if I cut my techs produced hours hours in half to 6 hours per tech, it looks like we would break even. Proposed first 3 months would be rent free but maybe I can negotiate more.

In your prime location, did you see double digit growth when you first opened or was it slow and steady?

My main concern with this start up is:

#1 Getting cars in and as many as I can as fast as I can. Obviously I will need to spend a lot of my time marketing to get our name out in the community. I do plan on spending time in community events to have the business be part of the community(I also live in this community as well)

#2 Making sure my expenses like rent are in line with the industry and if they are not how to do that or make them work.

Did you have other surprise expenses besides the ones you mentioned? I have exhausted my ideas of things I may need to pay for but I am still searching for more hidden ones as I plan.

Thank you for your reply and insight, I really appreciate your honesty and your openness about your business.

Edited August 12, 2021 by Theta
spell check!

[bantar]

We started with 1 Tech, then hired another after 6 months, but not because we were so busy, but more to cover more shop open hours, bursts of work and illnesses and vacations, etc.   Now mind you, during this time, we're not selling 100% of our hours, but my techs were being paid for 100% of their time.  This was a conscious investment.   Didn't hire the 3rd until the 4th year.    Each hire was an exercise in waiting for sufficient pain before hiring, followed by panic of whether the timing was right.

While we were growing, beginning of 2nd year, I had a copycat competitor open up 1 mile away.   They were heavily-capitalized.   7-8 months later, they shut down and then it reopened 7-8 months after that under a new name.   They ran heavy staffing and had way less business than we did.   But high expenses wear down big balances fast.   Again, I was in a panic, because I didn't know how they would affect my business while I'm just trying to survive.    I kept service levels up, expenses down and outlived them.

On rent and landlords, this is not my expertise.   I know a little from my friend that owns and leases shopping centers, office buildings...   Free rent is calculated as such....  He want's 100K in free rent.  I want 8% return on my money and want it back in 3 years.   Calculate the needed return, increase the base rent.... forever.   Next question, what are his odds of survival and how much can I collect if I have to sue him later for unpaid rent?   This is factored in too, with less free, or higher rent or both.    Make sure you find out about TripleNet, or whatever the lease terms are.  What building expenses are you responsible for?   Your rent might or might not include property taxes...  My annual tax bill is huge.  It can devastate your cash balance.  Tax man doesn't care if you are making money or not.     I'd say the tax payments were my biggest panic moments.   Letting go of so much cash felt uncomfortable.

You are looking at rent between $30K to $45K monthly.  These are big numbers needing big sales.   How many of months of cash do you need in the bank?    There's no right answer.    It depends on how fast you can grow to cover it.  

So far, I've followed each plateau in earnings with an increase (investment) in expenses... new people, raises, benefits, equipment.    We're still growing and I don't expect to level off for another 2-5 years.

See the theme?  Startup = Panic.  At least for me.   How do you know if any decision is right?   I'm still in startup mode, but I've managed to replace PANIC with worry.  

Here's an interesting story.   A car wash opened up next door to me and I talk with the owner monthly at least.   During his first 3 years, he lived in a constant state of Depression and Anger over the challenges of getting his business up and running.   It never rains here in the summer and yet he opened up to a 2 week monsoon... which meant he was closed during his grand opening.   I talked with him a few days ago and the depression is gone, but anger remains.   He's starting to get close to his revenue goals, and about 2 months ago, a sign went up for a new car wash about 1 mile away.   He told me that they will just go broke... there's no way to make any money here!    Who knows....   but he too had to carry this business for quite a while before breaking even.  Although, I'm not sure that he's done that yet.  

[Charlie]

Theta, I would caution you that you are entering into dangerous territory. You really want your rent at 7% in order to have strong net profits. If you own the property in a separate corporation, renting it at +/- 7% gross should deliver you a good cash flow to that property management corporation. If your shop was 8,000 sq ft at $40 per square you are looking at a monthly rent cost to the repair shop of $26,666. If that represents 15% of your gross then you need to consistently knock down $175,000 per month in gross revenue. In a down month, or God forbid a pandemic, that rent can become 35% of gross revenue and you are running in the red. 

We really don't want to forecast our businesses based on perfect situations, such as full parking lots and a full staff that shows up every day. Business is expected to be fluid and we must have the flexibility to ebb and flow. 

[John Shanderuk]

I concur I've been through this twice first time was a nightmare. Second time I had everything thought out to a tee and it still was a nightmare took 3 years to get out of it. I would plan for at least 150 to 200% more than you think you're gonna spend.

[rpllib]

I agree with the 7% rent factor. I know owners that have 13-15% rent factors and it is a lot of activity and generally not much return. I punched the ARCO location address into a demographic tool that I have been using for a couple decades. I then took that data and pasted it into the attached spreadsheet (column GV). When compared to many other locations shown in the sheet, I would call the mile high view of this location "average good". If you want to see exceptional, look for the Virginia Tire entries.

Again, "the mile high view" would suggest that this could be a successful location, but maybe not exceptional and maybe not a place I would risk a 15-20% rent factor. The "raw automotive retail market potential" is based on the idea that the 20k households surrounding your shop will likely be a good indicator of retail potential. It then assumes that household education followed by household income are the most important factors in determining the DIFM (do it for me) potential. The same formula has been applied to every location in the sheet. 

May be helpful. Definitely does not include other important factors like traffic patterns 

Caution would be advisable, Imo, if this is the area you are interested in.

misc2.xlsx

[Charlie]

1 hour ago, rpllib said:

I agree with the 7% rent factor. I know owners that have 13-15% rent factors and it is a lot of activity and generally not much return. I punched the ARCO location address into a demographic tool that I have been using for a couple decades. I then took that data and pasted it into the attached spreadsheet (column GV). When compared to many other locations shown in the sheet, I would call the mile high view of this location "average good". If you want to see exceptional, look for the Virginia Tire entries.

Again, "the mile high view" would suggest that this could be a successful location, but maybe not exceptional and maybe not a place I would risk a 15-20% rent factor. The "raw automotive retail market potential" is based on the idea that the 20k households surrounding your shop will likely be a good indicator of retail potential. It then assumes that household education followed by household income are the most important factors in determining the DIFM (do it for me) potential. The same formula has been applied to every location in the sheet. 

May be helpful. Definitely does not include other important factors like traffic patterns 

Caution would be advisable, Imo, if this is the area you are interested in.

misc2.xlsx 712.25 kB · 1 download

WOW, that's some powerful software. Nice!

[Theta]

On 8/14/2021 at 3:26 PM, bantar said:

We started with 1 Tech, then hired another after 6 months, but not because we were so busy, but more to cover more shop open hours, bursts of work and illnesses and vacations, etc.   Now mind you, during this time, we're not selling 100% of our hours, but my techs were being paid for 100% of their time.  This was a conscious investment.   Didn't hire the 3rd until the 4th year.    Each hire was an exercise in waiting for sufficient pain before hiring, followed by panic of whether the timing was right.

While we were growing, beginning of 2nd year, I had a copycat competitor open up 1 mile away.   They were heavily-capitalized.   7-8 months later, they shut down and then it reopened 7-8 months after that under a new name.   They ran heavy staffing and had way less business than we did.   But high expenses wear down big balances fast.   Again, I was in a panic, because I didn't know how they would affect my business while I'm just trying to survive.    I kept service levels up, expenses down and outlived them.

On rent and landlords, this is not my expertise.   I know a little from my friend that owns and leases shopping centers, office buildings...   Free rent is calculated as such....  He want's 100K in free rent.  I want 8% return on my money and want it back in 3 years.   Calculate the needed return, increase the base rent.... forever.   Next question, what are his odds of survival and how much can I collect if I have to sue him later for unpaid rent?   This is factored in too, with less free, or higher rent or both.    Make sure you find out about TripleNet, or whatever the lease terms are.  What building expenses are you responsible for?   Your rent might or might not include property taxes...  My annual tax bill is huge.  It can devastate your cash balance.  Tax man doesn't care if you are making money or not.     I'd say the tax payments were my biggest panic moments.   Letting go of so much cash felt uncomfortable.

You are looking at rent between $30K to $45K monthly.  These are big numbers needing big sales.   How many of months of cash do you need in the bank?    There's no right answer.    It depends on how fast you can grow to cover it.  

So far, I've followed each plateau in earnings with an increase (investment) in expenses... new people, raises, benefits, equipment.    We're still growing and I don't expect to level off for another 2-5 years.

See the theme?  Startup = Panic.  At least for me.   How do you know if any decision is right?   I'm still in startup mode, but I've managed to replace PANIC with worry.  

Here's an interesting story.   A car wash opened up next door to me and I talk with the owner monthly at least.   During his first 3 years, he lived in a constant state of Depression and Anger over the challenges of getting his business up and running.   It never rains here in the summer and yet he opened up to a 2 week monsoon... which meant he was closed during his grand opening.   I talked with him a few days ago and the depression is gone, but anger remains.   He's starting to get close to his revenue goals, and about 2 months ago, a sign went up for a new car wash about 1 mile away.   He told me that they will just go broke... there's no way to make any money here!    Who knows....   but he too had to carry this business for quite a while before breaking even.  Although, I'm not sure that he's done that yet.  

Was all the panic and stress worth it at this point?

Right now proposed rent plus NNN and taxes etc. would be $30K so yes big sales are needed for sure. I would assume I need at least 6 months of rent plus capital to even think about this but maybe I need a year?

Hiring does have me in a bit of a panic as I plan on paying flat rate(90% of the shops in our area flat rate shops, or a performance based hourly rate) and I know most techs will not stand around and not get paid while things ramp up, so that needs to be figured out....or I just start with a smaller staff and hire as I go like you did.

 

10 hours ago, Charlie said:

Theta, I would caution you that you are entering into dangerous territory. You really want your rent at 7% in order to have strong net profits. If you own the property in a separate corporation, renting it at +/- 7% gross should deliver you a good cash flow to that property management corporation. If your shop was 8,000 sq ft at $40 per square you are looking at a monthly rent cost to the repair shop of $26,666. If that represents 15% of your gross then you need to consistently knock down $175,000 per month in gross revenue. In a down month, or God forbid a pandemic, that rent can become 35% of gross revenue and you are running in the red. 

We really don't want to forecast our businesses based on perfect situations, such as full parking lots and a full staff that shows up every day. Business is expected to be fluid and we must have the flexibility to ebb and flow. 

I completely agree with what you are saying, I would love to get 7% rent and obviously me posting this shows I know that my rent is going to be on the high side. Risky for sure. Just was wondering if anyone in my situation had any insight like "DONT DO IT!" or "you could but you need to do xyz..." Are there success stories for someone paying higher rent in a better location?

In my forecasting I have been running through my numbers as hitting all my benchmarks for tech efficiency, labor and parts margins as well as a break even forecast and a bad(pandemic) forecast. Trying to see where all three of those land, how long in the red I can operate for before we have to close the doors etc. 

 

9 hours ago, John Shanderuk said:

I concur I've been through this twice first time was a nightmare. Second time I had everything thought out to a tee and it still was a nightmare took 3 years to get out of it. I would plan for at least 150 to 200% more than you think you're gonna spend.

Would you say that you underestimated your expenses(if so, what did you underestimate) or was it your revenue that you underestimated or I guess overestimated?

6 hours ago, rpllib said:

I agree with the 7% rent factor. I know owners that have 13-15% rent factors and it is a lot of activity and generally not much return. I punched the ARCO location address into a demographic tool that I have been using for a couple decades. I then took that data and pasted it into the attached spreadsheet (column GV). When compared to many other locations shown in the sheet, I would call the mile high view of this location "average good". If you want to see exceptional, look for the Virginia Tire entries.

Again, "the mile high view" would suggest that this could be a successful location, but maybe not exceptional and maybe not a place I would risk a 15-20% rent factor. The "raw automotive retail market potential" is based on the idea that the 20k households surrounding your shop will likely be a good indicator of retail potential. It then assumes that household education followed by household income are the most important factors in determining the DIFM (do it for me) potential. The same formula has been applied to every location in the sheet. 

May be helpful. Definitely does not include other important factors like traffic patterns 

Caution would be advisable, Imo, if this is the area you are interested in.

misc2.xlsx 712.25 kB · 6 downloads

What software tool is that if I may ask? Great data. That location is one of two proposed but basically both are the same type of location, hard signaled intersection with high traffic count. The other location has 40K households in a 3 mile radius, $129K average household income $98K median and 58% of the population with Bachelor degrees or higher.

And this is my risk, is the location/demographic enough to support paying double the rent that I should?

My business model is based on providing my clients with a high performance luxury experience that they did not know they were missing when having their car repaired, serviced, customized or modified for better performance because there are only maybe 3 or 4 other places like that in our general metro area do anything like this.

Appreciate the insight on the location and demographics. 

 

Thanks again to everyone's insight and words of caution, I appreciate it all!

[Transmission Repair]

Expensive rent is the cheapest advertising you can do.  We were located right on the I-15 freeway in Draper, UT, which is a suburb of SLC.   260K/day ADTT.  We were doing $1.2M almost immediately.  Bought the building in 2013 for $860K.  Retired in 2020.  Sold the business and real estate in 2015 for $2.6M, mostly cash.  Buyer folded after 5 years and now it's now a plumbing repair shop.  MyBuddyThePlumber.com paid all cash.

[Theta]

1 hour ago, Transmission Repair said:

Expensive rent is the cheapest advertising you can do.  We were located right on the I-15 freeway in Draper, UT, which is a suburb of SLC.   260K/day ADTT.  We were doing $1.2M almost immediately.  Bought the building in 2013 for $860K.  Retired in 2020.  Sold the business and real estate in 2015 for $2.6M, mostly cash.  Buyer folded after 5 years and now it's now a plumbing repair shop.  MyBuddyThePlumber.com paid all cash.

Would you mind touching on what your rent to revenue percentage was while you ran the business?

I agree that location is great advertising, just how much do you spend to make sense?

The buyer that folded, do you know the circumstances? 

Thanks for your insight.

[Metric Motors]

I would add one more line of thinking to this thread.

I learned early on that people have their auto repair done either where they live or where they work. I fortunate to have both in my area. I feel you need to have both. I would seek workers before residential.

You have mentioned retail and other services in the area, but you did not mention major employers.  Often those people that see you because of Starbucks or McDonalds will only be interested in your services if it's quick lube or tires. ie: If you're "retail". And don't mistake retail for employers. You will not find a strong customer base in retail areas for general repair. 

What are the major employers in the area, and what is the pay scale of their employees. Seek that first.

[Theta]

8 hours ago, Metric Motors said:

I would add one more line of thinking to this thread.

I learned early on that people have their auto repair done either where they live or where they work. I fortunate to have both in my area. I feel you need to have both. I would seek workers before residential.

You have mentioned retail and other services in the area, but you did not mention major employers.  Often those people that see you because of Starbucks or McDonalds will only be interested in your services if it's quick lube or tires. ie: If you're "retail". And don't mistake retail for employers. You will not find a strong customer base in retail areas for general repair. 

What are the major employers in the area, and what is the pay scale of their employees. Seek that first.

This is true. 

A major hospital is 2.4 miles away, Google is 3.4 miles away, Microsoft is 6.5 miles away and many other $100K plus employees are in the general 5 mile radius.

Research shows many of these employees live in the same area, new home/townhome construction targeting these employees is all within a 5 mile radius as well.

I think that the major traffic flow past this and another location I am considering may be the path between home and work for many of these employees. Not sure if I can prove it but it makes sense.

Thanks for the insight and a great way to think about it.

[Transmission Repair]

23 hours ago, Theta said:

Would you mind touching on what your rent to revenue percentage was while you ran the business?

I agree that location is great advertising, just how much do you spend to make sense?

The buyer that folded, do you know the circumstances? 

Thanks for your insight.

"Rent was 9% of sales.

The shop was doing $100K/mo. consistently.  The new owner let it fall to $30K/mo.  Rent became 36% of sales due to low business.  He closed this shop and another one he had for the same reason.  Lack of sales, management, and marketing.

Big parking lot, high traffic count, near a 12-dealership auto mall.

https://youtu.be/V89FJzM7KCg

[Transmission Repair]

On 8/23/2021 at 11:37 AM, Theta said:

Would you mind touching on what your rent to revenue percentage was while you ran the business?

I agree that location is great advertising, just how much do you spend to make sense?

The buyer that folded, do you know the circumstances? 

Thanks for your insight.

Rent was 11% of sales.

https://www.bbb.org/us/ut/salt-lake-city/profile/transmission/tanner-transmissions-inc-1166-85050006/complaints

https://www.yelp.com/biz/tanner-transmissions-salt-lake-city-17

The reason he closed was business got down to $400K/yr. due to many complaints.  He also closed a second shop.

[Transmission Repair]

On 8/23/2021 at 11:37 AM, Theta said:

Would you mind touching on what your rent to revenue percentage was while you ran the business?

I agree that location is great advertising, just how much do you spend to make sense?

The buyer that folded, do you know the circumstances? 

Thanks for your insight.

I'm sorry... I just caught these questions 10 months later. 😞

Rent was 8.9% of my gross sales.

Advertising was predominantly online PPC with Google and Microsoft advertising @ 4.2% of sales.

The buyer was terrible at business.  I sold him the shop with the previously doing $1.2M/yr. for the 3 previous years prior to the sale.  Starting almost immediately after purchase, sales began to fall.  The 5th year of his ownership, sales were down to $400K/yr. making his rent 33% of sales.  It wasn't sustainable.

I hope these answers help.

J. Larry Bloodworth