Business models are often thought of as the tools of venture capitalists, bankers, and academics. However, a model for an RMU business, wielded effectively, can be invaluable to developers and merchants alike. A good model predicts the merchant’s ability to pay his rent, estimates how many units must be sold to reach break-even, and provides warning when expenses are excessive. The next three posts will demonstrate simple approaches to modeling an RMU business.
Developers, and their agents rarely take an interest in a merchant’s finances beyond the traditional credit checks, asset validation, or in the case of longer term deals, historical review of financial statements. However, a leasing representative with a working knowledge of the RMU business model and the wherewithal to use it will be able to make better deals more consistently.
Let’s start with an imaginary, single product business. A merchant selling sunglasses wants to lease an RMU for three thousand dollars per month. The product has a retail price of twenty dollars and a triple keystone gross profit margin.
Retail Price = $20
Cost of goods = retail price ÷ 300%
Cost of Goods = $6.67
The merchant will be interested to know what sales volume will be required to support the rent expense. The gross profit for the sunglasses is:
$20 – $6.67 = $13.33
In order to pay the rent at this location, the merchant must sell:
$3,000 ÷ $13.33 = 225 pairs of sunglasses
In a thirty-day month, this equates to sales of eight pairs of sunglasses per day. If sales of eight units per day (on average) appears to be questionable target, then there is a good chance the merchant won’t be able to pay the rent. Extending this calculation to a real business might be a bit laborious, but is not complicated; repeat the calculation, but use an average gross profit margin to find the dollar sales volume that will pay for rent. This is done by averaging the weighted gross profit margin of each product in the line :
The sum shown above is the merchant’s average gross profit margin. Divide rent by the average gross profit margin and you have the sales volume in units required to pay for rent.
The ability to pay rent does not prove profitability, but it’s a reasonable place to start when evaluating possible locations for a common area business. In future posts, I’ll develop more comprehensive methods for calculating a true break-even figure for a common area business.