If you’re a business owner operating out of a storefront or retail space, there’s a good chance your lease negotiation might include a “percentage rent” clause. On paper, it may seem like a fair way to align your landlord’s incentives with your success—but before you sign anything, it’s critical to understand how this seemingly minor clause can have a major impact on your bottom line.
Let’s break it down.
What Is a Percentage Lease?
A percentage lease is a type of commercial rental agreement where, in addition to a base rent, the tenant agrees to pay a percentage of their gross sales to the landlord. It’s most commonly used in retail settings—think boutiques, coffee shops, salons, or small local franchises—where foot traffic and sales volume can vary month to month.
The typical structure looks something like this:
- Base Rent: A fixed monthly amount (e.g., $3,000/month)
- Percentage Rent: A percentage of gross sales, often around 5%–7%
While it may sound reasonable, especially in slow seasons when your overall rent might be lower, this kind of setup can come with unexpected consequences.
The Hidden Impact on Your Profit
Let’s say your business brings in $1,000,000 in revenue annually, and your net income is $250,000 (a 25% profit margin). If your lease requires you to pay 5% of sales on top of your base rent, that’s an extra $50,000 in expenses.
Your financials now look like this:
- Revenue: $950,000
- Net Income: $200,000
That’s a 20% drop in net income—even though your revenue only decreased by 5%.
This is the danger of looking only at percentages without considering how they affect your bottom line. A lease clause that appears minor can reduce your take-home profit by tens of thousands of dollars.
Why It Matters for Cash Flow
Percentage leases don’t just cut into profits—they can also wreak havoc on your cash flow. Unlike fixed rent, which is predictable, a percentage of sales means your rent fluctuates. In good months, you pay more. In bad months, you may not even hit your breakeven point after paying the landlord.
For businesses that operate on tight margins or depend on seasonal spikes (like holiday sales), these fluctuations can be the difference between growing or going under.
Run the Numbers Before You Sign
Before accepting any lease agreement—especially one with a percentage clause—take time to:
- Model different revenue scenarios
- Calculate the impact on net income and cash flow
- Speak with a qualified bookkeeper or accountant
Final Thoughts: Align Agreements with Long-Term Success
Percentage leases aren’t inherently bad. In fact, they can work well in some cases—like when you’re just starting out and want a lower base rent. But they’re not a one-size-fits-all solution. What matters most is understanding the full impact on your business finances before committing.
Need Help Making Financial Decisions in Your Business?
If you’re unsure whether a lease agreement supports your financial goals, it may be time to get a qualified bookkeeper in your corner. At Bullseye Bookkeeping, we help business owners make confident, data-backed decisions that support long-term growth. Contact us today to schedule your free consultation.
