Taking care of (small) business

When the spare room no longer cuts it, a bigger, better office can help your business flourish

Launching my own small business from an apartment in Sydney’s inner west in 2000 was a dream come true. However, the reality is that operating from a spare bedroom or garage can often hold back a business and you’ll need to set up shop elsewhere.

David Ente, a director of Raine & Horne Commercial South Australia, believes small to medium enterprises (SMEs) usually move to a commercial space because they are expanding and want a more professional address.

Anne Nalder, founder and chief executive of the Small Business Association of Australia, expands on this theme: “Due to the nature of the business, the owner may feel it will have more prestige by having a physical office.”

For me, the decision to shift into commercial space arrived in 2008 when I merged my content writing business with a colleague.

We settled on office space in St Leonards on Sydney’s lower north shore, which provided us with a sense of commercial legitimacy and a professional environment we could proudly invite our clients into for meetings.

Time to smell the roses

Family demands can prompt a shift to commercial space, says Ente, who over the past 20 years has helped many plumbers, electricians and landscapers move their business away from home.

“As the business grows, these guys often get kicked out as the kids come along and they generally opt for a small office or warehouse location,” he says.

“Typically, the perfect commercial property for tradies is an industrial unit, which is 100 sq m with an office, bathroom and a shed for storage or to park a trailer, van and other equipment.

“If you operate from a home office, it’s easy to look out the window and notice the roses need pruning. The next thing you’ve lost a workday in the garden.”

Nalder agrees a home business requires discipline. “It means one has to take running their business seriously and having children around can be a huge distraction,” she says.

Move to a co-working space

Before leasing a workspace, many businesses test the waters with a hotdesking arrangement offered by WeWork, Servcorp and Wotso. In theory, a flexible workspace or co-working site offers an SME the advantages of a centrally located business at a more affordable price than a traditional commercial office.

According to the comparison site Finder, prices for co-working spaces generally range from $500 a month for a hot desk up to $2000 for a private office. In addition, the fee might include commercial printers, scanners and quality internet. There might be reception and mail-forwarding services, cafe and bar facilities and even bike storage.

Nalder says service-related businesses are probably best suited to a hot-desking environment.

“Other types of businesses that wouldn’t be suited to co-working include retailing, manufacturing, catering and agriculture, as examples,” she says.

Ente agrees: “If you’re an insurance broker, financial planner, mortgage broker or a small one-man-band real estate agency, and you need a space where you can just plug in, grab a coffee, have a meeting and a professional address, then a co-working space could work.”

Technology businesses and marketing consultancies have also gravitated to co-working spaces.

Reverb, a media management and public relations advisory firm led by former Acuity editor Keith Barrett, operates from the co-working hub INNX in Newcastle. Reverb’s clients include ASX-listed financial services businesses and technology companies, which are mostly based in Sydney.

“Running a consultancy business from Newcastle with clients in Sydney meant it was unlikely I would need to entertain clients in my office,” says Barrett.

“Also, people running specialised consultancy businesses must use the best freelance talent available for individual projects. So it wasn’t in my best interests to have employees sitting in an office for 38 hours a week.”

Impact of Covid-19

Barrett also has a message for the co-working behemoths in the wake of Covid-19.

“I’m not sure how this model will work in the future,” he says. “I will be required to travel to Sydney less because we’ve all become proficient in video conferencing. However, if I need to jump onto a private Zoom call with one of the CEOs I work with, I will need a boardroom or quiet room readily available.

“A single boardroom for dedicated Zoom conferences won’t be enough, and for this reason I’ll need to consider my own space in the future.”

Also, shared workspaces are affordable because the model involves stacking together as many SMEs as possible into the floorplan.

“Post-Covid, social distancing will mean fewer people can use a co-working space, so as these workspaces establish what they can safely accommodate it may be more

expensive to have a dedicated desk or office space within one,” says Barrett.

Regardless of whether a business is considering leasing its own space or a co-working option, Nalder says the pandemic has impacted expansion plans. Ente agrees Covid-19 has forced many micro-businesses to shelve expansions plans in 2020.

“There are plenty holding off because they think they can do a super-duper deal because they think landlords will be begging for tenants. This is not the case,” says Ente.

“Right now, the vacancy rates we are seeing in Adelaide, for example, are not out of the ordinary, although the inquiry level from potential commercial tenants is marginally down.”

On the contrary, Nalder believes Covid-19 has given budding commercial tenants an excellent opportunity to drive a bargain. She says due to the coronavirus, business owners wishing to lease premises are in the driving seat. “If a landlord or agent is being difficult, seek someone else. But bear in mind that it is up to the landlord at the end of the day to accept or reject [your offer].”

What to consider in leasing

Negotiating a commercial lease requires you to understand the key terms and conditions contained in the lease clauses. However, in terms of how much you should pay for a commercial lease, Nalder counsels that an SME should only spend whatever it can afford.

“But as a rule of thumb, somewhere between 2% to 20% of rent to gross revenue is the unwritten rule,” she says. “Generally, a figure of 10% is the norm and having a budget is central to this decision making.”

When the time arrives to negotiate a commercial lease, Nalder advises a small business owner to determine what a shop, industrial unit or office must have to support your business and the accessories and trimmings that you are prepared to forgo. Because you need to commute to the office, you might decide that parking is important, but you could survive without a kitchenette.

Also, be mindful that a commercial lease is much longer than a residential lease, which is usually for 12 months.

“A commercial lease normally has a minimum of three years with options to extend,” says Ente. “There are more obligations on the commercial tenant than in a residential lease, including the maintenance of the property and the payment of all outgoings such as utilities. You also need to organise a security deposit over the lease.”

A security deposit, or deposit bond, is paid by a commercial tenant to the landlord as a guarantee. It is typically equivalent to up to three months of rent.

An office fitout might also be paid for at the tenant’s expense. However, this depends on the negotiations, according to Ente.

“Instead of a rent-free period, a tenant might negotiate a contribution to the fitout from the landlord. Consequently, you need to ensure the term of the proposed lease is long enough for you to recoup your investment in a fitout.”

Nalder encourages SMEs to try to negotiate a better rental rate. “The longer the lease, the better the rate that applies, while also ask for a rent-free period – and this should include the utilities also. I’d also try and negotiate a rent-free period if you must have the premises redone.”

Ente says new commercial tenants should be realistic.

“We had a possible tenant just last week who offered an annual rent of $12,000 where the landlord wants $20,000. The tenant also wanted outgoings such as water rates and electricity included in the lease agreement. He was never going to do a deal and just wasted everyone’s time.”

New commercial tenants should ask their landlord for a sub-lease clause, advises Nalder.

“This clause allows you to sub-lease if things get tough financially,” she says. “Also get an agent or lawyer to negotiate on your behalf if you can afford the fees. They would be less emotionally attached.”

Ente says a commercial lease is a longterm commitment that is expensive to get in and out of. So do your research first.