What does it really cost to run your pizzeria?
“Build your business on fixed costs.”
— Jeff Bezos
When you start to pull data about failing businesses, there are many reasons why they don’t make it. A lot of people will blame sales, or employees or even location. However, much of the time the failure is set up before they even make their first sale. The fixed costs in your business that you cannot change can make or break you.
A high rent is the first mistake that a lot of new business owners make. I know that most people fall victim to square footage and paying so much per square foot. I think it is more prudent to negotiate off what you think your sales may be. The industry standard is to have a rent between 6 and 10 percent. With that said, my rents are between 2 and 4 percent and have always been.
A lot of times the market dictates rent. However, always remember a landlord wants to have a tenant — and a good tenant. Every month that their building stays empty is a month that a rent check does not hit their account. Most times, as operators, we feel like everyone else holds all the cards. Yet, in fact, he who holds the cash makes the rules.
Having an attorney involved in the negotiations is also prudent. Leases vary in many different forms. I have learned the hard way what costs I am responsible for after the fact. On our second location, a week after we took over, our heat stopped working. I called the landlord, and he told me to read the lease. Eight thousand dollars and a new furnace later, I learned a very important lesson. On the next lease I had an attorney involved. I was able to ask and successfully have all the heating and air repairs included in the lease. I have also been able to stay clear of triple net leases by having my attorney involved.
A triple net lease is a type of commercial lease where the tenant pays the base rent plus the cost of property taxes, insurance and maintenance. The downfall here is when a property gets re-assessed and you — the tenant — are now responsible for the increase in taxes. I try to avoid a triple net lease at all costs. That is the worse-case scenario, but a surprise invoice for your landlord’s insurance increase is not a bill I like paying either. All of this is avoidable if you have read and re-read a potential lease and understand everything in it.
Lastly, when your lease begins it does not necessarily mean that is when your payments need to begin. Negotiating that your payments start when you are actually open is a possibility that many operators do not consider. You will never know unless you ask. I like to ask that question after the monthly rent rate has been established.
There are many other contracts aside from the lease that need negotiated before you sell your first pizza. We will talk about those in the next installment of Building Blocks.
Nick Bogacz is the founder and president of Caliente Pizza & Draft House in Pittsburgh. Instagram: @caliente_pizza
