This pandemic and the government’s response to it have forced America into a new economy that will be painful for the staid businesses of yesterday.
At the same time, this may be the most extraordinary time to open the right business since the American revolution.
Money is cheap; interest rates are at record lows and vacant spaces are plentiful nationwide at the lowest rents since I started practicing law.
America is bursting at the seams as people get their vaccines, step out, and spend money like never before.
I have spent the last year in the trenches with countless shops going out of business because of mistakes they made when they first signed their lease. The new business model for those starting fresh in 2021 must offer the confidence that it will not fail but also the humility that it must protect itself in case life happens.
Here are three things that every new business must do before opening shop:
Never Sign a Lease in Your Own Name
Most leases are for at least 10 years. No one can predict what life will be like that far ahead—the business may need to triple its space in 10 years or unfortunately it may have to close up because it cannot make the rent or pay its employees.
Because your paycheck and your home are both in your name, the landlord can go after both of these items if the store shutters.
Companies should sign a lease using the name of a limited liability company or an S-corporation. I try to persuade potential retailers against using the name of the store or company name for the LLC or S-corporation in case the company takes off. I recommend an anonymous name that only holds the money the company collects.
If the landlord does not go for the LLC or demands a personal name, then many landlords will accept an additional security deposit or additional money to be held by the landlord in case the tenant defaults in the payment of rent.
If that is not acceptable, then many landlords will accept a document called a “good-guy guaranty.” The good guaranty allows the tenant to get out of the lease and no longer owe the landlord money at any time as long as the tenant has paid the rent in full at the time of terminating the lease in writing.
Following this advice will often determine whether the business financially lives or dies during trying times.
Location, Location and the Law
It is well known that where you place your business may determine the amount of human traffic you will receive. In addition, in many locations and especially busy areas, the local towns and cities may heavily regulate what types of businesses can reside at certain locations.
Before signing that lease and investing money into a space, check with the local town or an attorney to make sure that such a business’ use will be permitted.
Also, even if the business is permitted, you may want to spend time around town to understand if your neighbors will revolt if your dream is to have a bar with a live rock band playing on the block. One way to test this would be to see what business previously resided at the location.
Negotiating Repairs into a Lease
American states enforce lease provisions. Structural repairs can sometimes cost more than a year’s profits.
It is imperative that the lease makes the landlord responsible for all repairs, or at a minimum, structural, or serious repair issues.
Typical structural repairs include the roof, the boiler, the elevator, the HVAC, and anything behind the walls that you cannot see. In many cases, it may be worth walking away from a lease rather than being responsible for these repairs.
Adam Leitman Bailey is an award-winning real estate and business attorney based in New York State. His latest book is “Real Estate Titles: The Practice of Real Estate Law in New York.”