The Biggest Mistakes that Startups Make When Leasing Office Space

As a business grows and expands, it’s easy to begin imagining moving into a larger, more permanent space. This is especially attractive for the startup crowd, which romanticizes the “build it in your garage” mentality while striving for the authenticity of a physical, professional office.

But moving too quickly – even in the startup phase – can have serious repercussions on your business that could hinder your growth and agility for years to come. That’s why it’s so important to consider your options and avoid the pitfalls that plague startups who choose to lease a commercial office space too soon or otherwise overextend themselves in the early stages.

How to Find the Right Space for Your Budget

There are plenty of factors to consider when hunting for a new office space. Square footage, amenities, location, age of the building – the list could go on forever. But the main criteria should be price and there’s plenty of examples of startups overextending themselves in an effort to impress venture capital, potential employees, and clients. It’s – important to consider your bottom line and projected revenue during the negotiation process. There are plenty of options in the commercial real estate world for companies on a budget, but also plenty of snags that could hinder your overhead ratio. Take particular care in the late stages of any commercial real estate lease process to ensure your company stays away from hidden expenses, utility/maintenance costs, and cost-per-head fees – which a tenant representation broker can help you navigate.

What to Prepare for a Potential Landlord and What They Expect from a Tenant

Smaller companies tend to have difficulty locating and securing office space (even with a tenant representation broker), making it harder to compete in certain markets. That’s why you’ll need to consider the following when entering the negotiation process with a potential landlord:

More Than 5 Full-Time Employees

There’s no doubt that a startup with more than a few employees looks good at first impression – after all, walking into an empty office isn’t a good sign for clients, partners, or financiers. But if your headcount is hovering around a half-dozen full-time employees, it’s a sign that your efforts have paid off so far. After all, the average startup with fewer than 5 employees has a failure rate of 34% and landlords are fully aware of that statistic.

Strong Financial Information and Projections for Growth

Landlords want to see solid financial information from any prospective tenant, which is understandable. But fresh businesses may have trouble coming up with a solid financial history to satisfy their expectations. They’ll want to see solid net revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), a positive liquidity ratio, and a debt to equity ratio below industry standards.

Speaking of industry, every business seeking commercial real estate leases should be prepared to show a recent business plan to both landlords and potential financiers. You’ll need to demonstrate that your industry of focus is healthy, growing, and profitable with plenty of space to expand. Even then, you should be prepared to show personal/guarantor financials or a letter of credit from a financial institution.

Top Pitfalls to Avoid

Small businesses and startups alike tend to fall into the same pattern of making early mistakes that could end up costing you in the long run. Office space is typically the second highest expense that businesses incur (outside of employee compensation and benefits), meaning you’ll need to take a careful look at your finances before jumping into a commercial lease agreement. The following list will explain what to avoid:

Going It Alone

If there’s one thing that small business owners should avoid during an office search, it’s trying to take on the project solo. Commercial real estate is a professional industry rich with experts that are immersed in the local market. Unless your business has to do with commercial real estate, you’re better off handing the workload to a tenant representation broker. Not only will they not cost you any money, they’ll represent your interests and negotiate on your behalf to any potential landlords and handle the search process during the exploratory phase.

Going for the First Available Space

Flexibility and simplicity are attractive attributes when looking at a long-term commercial real estate lease, but there’s prudence in investigating your options over a multi-year agreement. It’s critical that you take your time and wait for the right space to become available for your needs and budget rather than overextend your business for a space that may allow for larger growth (and overhead) than you’re ready to take on right now.

Remember – any change of venue will have a huge impact on both your workforce and clientele. While your employees may enjoy more space and amenities, any visiting customers could see empty, unused space as a lack of growth and prosperity.

Settling for a Coworking Space

While coworking or shared office spaces are a wonderful option for growing businesses or freelancers seeking a stable, reliable environment to perform in a professional manner, it’s important to consider a permanent space compared to a shared area.

While coworking spaces have their advantages – namely private conference/phone areas, built-in amenities, and networking opportunities, the standard size for most coworking environments top out around 50 square feet per person. Needless to say, that’s not sustainable for a growing company, where industry experts set the minimum space requirement per employee at 100 square feet or more.

Shared office spaces are a great stop-gap for companies at the earliest of stages and freelancers seeking networking opportunities, but there’s nothing that provides a foundational feeling as having your business’ name on the door.

Moving Ahead (and Looking to the Future)

The road to your first permanent, professional office can be a difficult one to navigate, but ensuring you’ve done your homework and set realistic expectations is the best way to avoid the mistakes listed above. There’s no tried-and-true, trouble-free method for startups seeking their first office, but with these points in mind, you’ll be better equipped to handle the challenge.

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

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