If you’re curious about “the impact of the current financial crunch on small businesses”, just read this e-mail message:

“We opened up a franchised retail store using a home equity loan a couple years ago. We’ve been keeping our head above water, but with the current economy things are going south. To add insult to injury, the home equity line of credit has been since frozen by the bank because the value of our home has gone down.  I looked at our lease, and we are stuck with a personal guarantee for the rent for 10 years. I think we are going to have to close the doors and was wondering what I should do about the lease.”

The basic problem here isn’t the rent – it’s cash flow.  Obviously the business isn’t generating sufficient cash to pay the rent each month and pay you a living wage without your having to tap your credit line.  Do everything you can to get your costs down to rock bottom – fire your employees and hire your kids and teenage nephews and nieces.  Not only are they inexpensive labor, but you actually get tax breaks for that.

Then, call your franchise, explain the situation, and ask them for a “break” on your monthly royalty payments until you turn cash-positive.  If that doesn’t work, tell the franchise you want to sell your location, and start looking for buyers.  Focus on recent immigrants to the United States – these folks will jump at the opportunity to own their own business if the price is affordable, and they stand a much greater likelihood of success because their cost-of-living expenses are likely to be much lower than yours.

If all else fails, it’s time for a “heart to heart” conversation with your landlord.  Explain your situation, and be prepared to back it up with hard numbers so the landlord doesn’t think you’re a “crybaby”.  Offer the landlord a monthly “percentage rent” in exchange for a reduction of your fixed monthly rent – this is a percentage of your gross sales each month, and usually is in the range of two to five percent.  Doing this makes the landlord a partner in your success or failure – if the economy improves, he may actually do better with this arrangement than he is currently with just a fixed monthly rent payment.

If the landlord isn’t willing to “play ball” (and many won’t, because their mortgage banks are playing the same games with them that your home equity lender is playing with you now), then it’s time to throw in the towel.  Tell the landlord that you will have to vacate the space in a few months, and let him know he needs to show the space to prospective new tenants.  If your landlord is able to find a new tenant for your space before you run out of money, you will still be liable on your personal guaranty, but there’s a good chance you won’t be called on it if the new tenant is a solid one.

If the landlord has to reduce the rent for your space in order to attract a new tenant, you will be on the hook for the difference between the rent you were paying and the rent the new tenant is paying.  Offer to pay this amount each month rather than in a  “lump sum” installment.  Not an attractive prospect, of course, but it’s a whole lot better than being on the hook for 10 full years of monthly rent charges.

“We’re a small business that’s been operating in the same location for over 40 years.  Our lease is up for renewal in a couple of years, and we’re a little worried.  We live in a very upscale community, and our landlord feels he should be getting a lot more rent per square foot from his tenants because other landlords in town are getting a lot more rent from theirs.  Earlier this year our landlord asked for 50% increases in rent for two other stores in the center whose leases came up for renewal – the owners had to go out of business or move out of town because they couldn’t afford the increase, and the store locations remain vacant to this day.”

Hopefully your landlord’s experience with the two other tenants will “wake him up” to the idea that his rent increases are unreasonable, but you can’t assume that will happen.  Start looking for other space in town, and focus on spaces that are owned by large commercial realty companies as opposed to “Mom and Pop” landlords.  “Professional” landlords don’t make decisions based on emotion or guesswork – whatever you are offered will probably reflect a fair market rental for your area.  Once you get an acceptable quote, show it to your current landlord with an offer to renew your current lease on the same terms – and the implied threat that you have somewhere else to go if he refuses.  Hopefully that will bring him back to reality.