Why the Math Doesn’t Add Up for Service-Based Businesses in Retail Shopping Centers
As a business consultant working closely with small business owners and entrepreneurs, one of the biggest red flags I see—over and over again—shows up in lease agreements. Specifically, service-based businesses being pushed into retail shopping centers with rent structures that simply don’t make financial sense.
On paper, these retail centers look attractive. High visibility. Foot traffic. Established locations. Landlords pitch them as “prime” spaces that will elevate a business overnight. But when you actually run the numbers, the math doesn’t add up—especially for service-based businesses that are otherwise well-run and financially sound.
The Reality of Service-Based Revenue
Let’s talk about revenue first.
Most service-based retail businesses—think hair salons, nail studios, massage therapy, lash bars, fitness studios, and wellness concepts—are not $5 million businesses. The vast majority operate under $1 million in gross annual revenue, and many are well below that threshold.
That doesn’t mean they aren’t successful. In fact, many of these businesses are profitable, stable, and have loyal client bases. But they operate with fixed capacity: limited chairs, limited hours, limited staff, and limited appointments. Revenue doesn’t scale infinitely the way product-based retail does.
Yet landlords often price these spaces as if service businesses generate the same upside as national retailers or high-volume product sellers.
They don’t.
When Rent Eats 20–30% of Gross Revenue
Here’s where the math breaks down.
In today’s market, it’s common to see service-based businesses paying 20–30% of their gross revenue just in rent and occupancy costs. That figure often includes base rent, CAM charges, insurance, property taxes, and annual increases baked into the lease.
For a service business, this is unsustainable.
Industry benchmarks typically suggest that rent should fall between 6–10% of gross revenue for a healthy service-based operation. Once you exceed that, profitability erodes quickly—no matter how good the business owner is.
When rent alone consumes a quarter of gross revenue, there’s very little left to cover:
- Payroll and labor taxes
- Supplies and inventory
- Marketing and client acquisition
- Equipment and maintenance
- Owner compensation
- Profit and reinvestment
At that point, the business isn’t growing—it’s surviving.
Why “Prime Retail” Is Often the Wrong Fit
Retail shopping centers are designed to support businesses that rely on impulse buying, high transaction volume, and product turnover. Service-based businesses don’t operate that way.
Clients don’t walk into a nail salon, fitness studio, or massage practice on impulse at the same rate they walk into a coffee shop or clothing store. Service businesses grow through repeat clients, referrals, and reputation, not foot traffic alone.
Yet landlords continue to price these spaces based on foot-traffic assumptions that don’t translate into service revenue.
The result? Well-run businesses are signing leases that slowly bleed them dry.
The Lease Agreement Is the Silent Killer
Many business owners don’t realize they’re in trouble until it’s too late.
Lease agreements often include:
- Aggressive annual rent escalations
- Long-term with no flexibility
- Personal guarantees
- Limited exit options
- Triple-net structures that shift risk to the tenant
For startups and existing service businesses, these terms can lock owners into years of financial stress—even if the business itself is performing well.
This is one of the most common mistakes I see entrepreneurs make: falling in love with a location without fully understanding the long-term financial impact of the lease.
There Are Better Options
The good news? Not all landlords think this way.
There are property owners who understand service-based models, startup realities, and long-term tenant value. The challenge is knowing where to look, how to negotiate, and what terms actually support profitability.
A good lease doesn’t just get you into a space—it allows you to stay there, grow there, and build long-term value.
How BL Consultant Helps
At BL Consultant, we specialize in helping service-based businesses make smart, strategic decisions—starting with the lease.
We work with small business owners and entrepreneurs to:
- Negotiate fair, sustainable lease terms
- Identify locations that align with revenue realities
- Reduce unnecessary occupancy costs
- Protect owners from risky lease language
- Strategically position businesses for long-term success
A strong business can still fail under a bad lease. Our job is to make sure that doesn’t happen.
If you’re considering a new location, reviewing a lease, or feeling pressured into a space that doesn’t quite make sense, now is the time to pause and get expert guidance.
Reach out to BL Consultant today.
We help business owners profit by making good decisions—so your business can thrive, not just survive.