A unit quoted at £35,000 a year in rent looks, to most people doing the sum in their head, like it needs £35,000 of extra sales to justify itself. That arithmetic is wrong, and the gap between it and reality is where an otherwise sound premises decision can come unstuck.
Rent does not come out of turnover pound for pound. It has to be paid from what the business retains after the costs incurred in generating those sales. At its simplest, that means looking at gross margin. For a proper break-even calculation, it means going further and looking at contribution — what each additional pound of revenue contributes after the variable costs needed to produce it.
Get that distinction wrong at the planning stage, and premises that looked comfortably affordable against turnover can turn out to require considerably more sales than the business, or the location, can realistically deliver.
The real annual cost, before a single sale is made
Before any turnover question can be answered sensibly, the cost of occupying the premises needs to be established properly, and it is very rarely just the rent.
Depending on the business and the unit, that can include rent, business rates, service charge, utilities, insurance, cleaning, security, waste collection, repairs and maintenance, licences, additional staffing created by the premises and finance costs associated with the fit-out. Lease obligations can create less obvious exposure too, including repair responsibilities and potentially significant costs when the premises are eventually handed back.
Not every business will face every cost, and not all of them behave in the same way. Rent may be largely fixed for a period; electricity use varies with trade; staffing may be partly fixed and partly responsive to sales; fit-out may require a large payment before the doors open.
That distinction matters when cash flow is modelled, but the first discipline is simply to get everything onto the page. Treating “rent” as a proxy for “occupancy cost” can make an apparently cheap unit considerably more expensive once the rest of the building is accounted for.
Headline rent also needs separating from the effective economic cost of the lease. A unit quoted at £35,000 a year with a six-month rent-free period, stepped rent or landlord capital contribution is not economically identical to one charging the same headline rent from day one with no incentive. For affordability purposes, those incentives should be considered across the period the business realistically expects to occupy the premises rather than allowing an unusually cheap first year to disguise an expensive lease thereafter.
The reverse matters too: a generous incentive package does not rescue premises whose underlying rent and operating costs become unaffordable once the incentive ends.
VAT needs checking rather than assumed away as well. Commercial rents are normally exempt from VAT, but a landlord can opt to tax a property, in which case VAT will normally be charged. Whether that creates a recoverable tax item or an additional cost depends on the occupier’s own VAT position. The same issue can affect service charges and other property costs, so quotes should be checked to establish whether they are VAT-inclusive or VAT-exclusive before the cash requirement is modelled.
HMRC — VAT Notice 742A: Opting to tax land and buildings
There is also a separate cash question that annual affordability does not answer. A business may be perfectly capable of supporting the premises once trading normally and still need substantial cash before opening: a rent deposit, advance rent, legal and professional fees, fit-out, initial stock, utility connections or deposits and other opening costs.
Those amounts should be modelled separately from the annual occupancy figure. Can the business afford to occupy the premises over time? and can it fund the cash needed to get into them in the first place? are different questions.
Business rates can materially change the picture
Business rates deserve separate attention because both the rating list and the multiplier structure changed in 2026.
In England, from 1 April 2026, qualifying retail, hospitality and leisure properties with a rateable value below £51,000 use a small-business RHL multiplier of 38.2p. Qualifying properties with a rateable value from £51,000 to £499,999 use a standard RHL multiplier of 43.0p. Properties with a rateable value of £500,000 or more fall within the high-value multiplier, which is 50.8p for 2026/27.
The important distinction is that the lower RHL multiplier structure is intended to be permanent: qualifying properties below £500,000 are to benefit from multipliers set 5p below the relevant national multipliers. The exact pence figures can change from year to year, so 38.2p and 43.0p should not be treated as permanent rates.
GOV.UK — qualifying retail, hospitality and leisure business-rates multipliers
The figures above are England-specific. Business rates are devolved, and Wales, Scotland and Northern Ireland operate different systems. Businesses should therefore use the rules for the nation in which the premises sits rather than carrying an English multiplier into a UK-wide comparison.
The other major 2026 change is the revaluation. New rateable values came into force in England and Wales on 1 April 2026 and are based on rental values at 1 April 2024. A rateable value is not the same as the rent and it is not the bill: the billing authority applies the relevant multiplier and any applicable reliefs or transitional arrangements.
GOV.UK and the Valuation Office Agency — help with the 2026 business-rates revaluation
For an affordability calculation, the sensible approach is therefore not to estimate rates from the rent or from what the previous occupier paid. Check the current rateable value, identify the multiplier that actually applies to the premises and business use, and work from the likely bill.
Service charge: the same discipline applies
Where a unit sits within a shopping centre, retail park, managed parade or other multi-occupier property, service charge can sit alongside rent and rates as another substantial commitment.
The marketing figure may only be an estimate. What the tenant ultimately pays depends on the lease, the services being provided and the costs incurred in operating the property.
Before relying on a service-charge figure, ask for the current budget and recent reconciliations or year-end accounts where available, and establish whether significant works or changes to services are expected. The objective is not to predict every future invoice perfectly; it is to understand whether the quoted figure is representative of what the premises has actually been costing to run.
RICS’s current UK professional standard for commercial service charges, effective from 31 December 2025, emphasises transparent budgeting, timely year-end certification and consistent administration. The lease remains fundamental to what can actually be recovered from an occupier.
RICS — Service charges in commercial property, 2nd edition
The distinction that changes the whole calculation
Here is the part of the exercise that matters most.
A business does not have every pound of additional turnover available to pay its property costs.
Suppose a retailer sells something for £100 that costs £35 to buy or manufacture. Before considering anything else, that sale has generated £65 of gross profit: a 65% gross margin.
So £100,000 of additional turnover at that margin generates £65,000 of gross profit, not £100,000 available for rent.
That is the useful first-pass calculation.
But a sophisticated affordability model should go one step further, because cost of goods sold is not necessarily the only cost that rises when sales rise.
Extra transactions may also create card charges, marketplace commissions, packaging, delivery costs, consumables, sales-linked labour or other variable expenditure. Depending on the accounting policies and business model, some of those costs may sit outside reported gross margin.
That is where contribution margin becomes more useful.
Contribution is the amount left from sales after the variable costs associated with producing those sales. That contribution then has to cover the fixed costs of running the business — including the premises — before anything becomes profit.
The distinction matters because a 65% gross margin does not automatically mean 65p from every additional £1 of sales is genuinely available to support fixed occupancy costs.
There is no useful universal margin assumption for a property decision either. A food business carries ingredient costs but may also need labour to increase as volumes rise. A retailer can have radically different product margins depending on whether it sells groceries, fashion, furniture or specialist goods. A salon, clinic or other service business may have relatively little physical cost of goods but substantial labour directly associated with delivering each appointment.
Even two businesses in the same sector can have very different economics because of purchasing terms, staffing models, product mix, waste, discounting and pricing power.
That makes the business’s own figures much more valuable than an industry average.
For an established operator opening another site, actual gross margin and variable-cost data from existing locations should normally be the starting point, adjusted where the proposed premises will operate differently.
For a new concept without trading history, assumptions need to be researched and deliberately conservative. A benchmark can be a useful sense-check. It should not become the number simply because somebody else’s business achieved it.
ACCA — cost-volume-profit and contribution analysis
There is no universal “safe” occupancy-cost ratio
The same applies to rules such as “rent should never exceed X% of turnover”.
Such ratios can be useful for comparing similar businesses or testing whether an assumption looks unusual, but they become dangerous when treated as an underwriting rule.
Even the definition can change. One benchmark may measure rent alone; another may include rates and service charge. One may use gross turnover; another net sales. A mature high-volume restaurant, an independent boutique, a convenience store and an appointment-led clinic can sustain very different property-cost structures.
More importantly, two businesses with the same occupancy cost as a percentage of turnover can have completely different levels of resilience once gross margin, labour and the rest of their overhead are taken into account.
The better question is not whether the property falls below an arbitrary percentage. It is whether enough contribution remains after the sales needed to operate the business have been generated to cover the premises, other fixed costs and the return the owners actually require.
A transparent worked example
Take a business where the fixed annual premises cost — rent, rates, service charge, insurance and other committed property costs — comes to £60,000.
Assume first that the business operates at a 65% gross margin.
To generate £60,000 of gross profit, it would require:
£60,000 ÷ 0.65 = approximately £92,300 of sales.
That immediately shows why saying “a £60,000 premises cost requires £60,000 of turnover” is wrong.
But £92,300 is not the business’s break-even turnover. It is simply the amount of sales required to generate £60,000 of gross profit at that assumed margin.
Now suppose the same business has additional sales-linked costs that reduce its contribution margin to 55%.
The sales required to generate £60,000 of contribution become:
£60,000 ÷ 0.55 = approximately £109,100.
That is already nearly £17,000 more turnover than the gross-margin calculation suggested, before considering the rest of the business’s fixed overhead.
True whole-business break-even requires those other fixed costs to be included as well.
The basic relationship is:
Break-even sales = total fixed costs ÷ contribution margin ratio
So if this business had £180,000 of total annual fixed costs including the premises, and a 55% contribution margin, break-even turnover would be approximately:
£180,000 ÷ 0.55 = £327,300.
That is the more commercially meaningful figure. The premises is not being asked merely to generate enough sales to pay the rent. The business conducted from it needs to generate enough contribution to carry the entire fixed-cost structure.
The calculation is still a model rather than a prediction. Contribution can change as sales mix changes, staff requirements step up and suppliers alter prices. But it forces the premises decision to reconcile with the economics of the business rather than stopping at the rent quote.
Fit-out: a cost that needs its own payback logic
Where meaningful capital is being spent preparing premises, that spend needs its own test.
A £150,000 fit-out paid on day one is not made affordable merely because it can be spread over several years in an internal model or accounted for through depreciation. The cash still has to come from somewhere — retained funds, borrowing, investor capital or landlord contribution — and finance itself may carry a cost.
For decision-making purposes, it can still be useful to spread that expenditure over the period for which the business genuinely expects to benefit from it. But the resulting annualised figure should sit alongside a separate cash-flow test.
The questions are different.
Can the business fund the fit-out?
And:
Will the premises generate enough additional profit over the likely occupation period to justify that capital?
Lease length, break rights, landlord contributions, rent-free periods, the reuse value of the fit-out and the cost of stripping alterations out again can all change that answer.
A fit-out with a ten-year payback attached to premises the tenant can realistically occupy for five years has a problem no annual rent calculation will reveal.
Premises can create staffing costs beyond the obvious
A physical location often triggers additional staffing that isn’t labelled as a property cost but exists because the premises exists.
That can mean longer opening hours, front-of-house cover, security for evening trading, kitchen staff scaled for a dining room rather than delivery-only operation, management coverage or cleaning beyond anything included in the service charge.
How those costs should enter the model depends on how they behave.
Staff who have to be employed regardless of whether 50 or 100 customers arrive are effectively part of the fixed cost of operating the location. Labour that increases directly with transactions is better treated as a variable cost when calculating contribution.
The distinction is more useful than arguing about whether staffing is technically a “property cost”. The real issue is whether taking these premises creates the cost and whether the model has allowed for it.
Testing the downside, not just the plan
A premises appraisal should not contain only one version of the future.
If the expected case assumes £600,000 of annual sales, model what happens at £540,000 and £480,000 as well. Test what happens if gross margin tightens, if the service charge rises, if utilities cost more than assumed, or if additional staff are needed sooner than expected.
Then test timing.
A business can be viable at mature annual turnover and still run out of cash before it gets there.
If sales take three, six or nine months to reach the level assumed in the mature forecast, the model should show the cash requirement during that ramp-up period. Fit-out overruns, delayed opening, deposits, advance rent and initial stock can all consume cash before normal trading has generated anything to replace it.
That introduces a second question alongside break-even:
how much runway does the business need to survive until break-even is reached?
The answer can matter just as much as the eventual annual profit.
A model that works only when sales, margins, opening date and costs all land exactly on the central forecast is telling the owner something important about the risk in the premises decision.
The test that actually matters
The question worth answering before signing isn’t simply:
“Does the rent look affordable against our turnover?”
It is:
“What level of sales does this premises require once the margin and variable costs are properly accounted for, what level of total sales does the business need to break even, and can this particular location realistically produce that turnover before the available cash runs out?”
Those are related questions, but they are not the same calculation.
A cheap unit that requires an unrealistic number of transactions can be worse value than an expensive one capable of supporting substantially greater sales. Equally, an apparently excellent location can still be unaffordable if the rent, rates, service charge, staffing requirement and capital tied up in fitting it out leave too little margin for error.
The useful output from this exercise is therefore not a maximum rent figure in isolation. It is a relationship between occupancy cost, contribution, required turnover, achievable sales and cash runway.
If those numbers do not reconcile before the lease is signed, a better-looking spreadsheet after the doors open will not fix them.
This article provides general commercial property and business information, not financial, accounting, tax, valuation or legal advice for individual circumstances. Costs, margins, business-rates treatment and break-even calculations depend on the particular business, premises and jurisdiction. Businesses should use their own figures and obtain appropriate professional advice before making a substantial lease or investment commitment.
