Business Therapy: Why do we have key money?

Post by Loaay

emptyshop

A small shop in Souq Al-Manakh, the marketplace for stock and real estate trading back in the day, would’ve easily sold for KD20 million in the late 70’s and early 80’s. That’s around KD2 million per square meter. Why? Because you could only trade if you had a spot there. Excessive but when small traders were making millions a month, you can see why the amount sounds like a catch. Today, you can easily find shops in major malls being offered for anywhere from KD50,000 – KD500,000 just for key money alone. So when everyone is technically renting the space, why do we have key money in the first place?

The first clue is in the name. I’ll hand over the key of my shop to you for a certain amount. So it’s not about you buying the place as much as it’s for me leaving it, and to you specifically, of course. You could say it started as a form of incentive and a nice way out. But as new and hot places are always in demand, people started to jump on them as a way of making money. For example, it’s quite common to find a shop in a new mall opening only to shut down in nine or twelve months to be sold to someone else for a good hefty profit simply because all spaces are occupied and other businesses want to be in that mall. While that first business may look like a failure to consumers, in reality, the whole thing was just a pop-up shop waiting for the next buyer.

Sometimes, because the buyer is emotionally attached to that location they offer a lot of key money to put their hands on a place believing that when they are ready to leave, they will get their money back and more, which beats putting it in the bank these days. Of course, there’s always the risk of not being able to sell it when you need to, but as with any business there’s always a risk. Sometimes, it’s a personal vendetta. If I don’t want someone from a specific family to have that shop I’ll pay whatever it takes not to give them a chance. Let’s not forget, we are in a tribal society. There are many other reasons why companies and entrepreneurs lean towards paying key money. There are also many policies put in place by some developers to encourage and others to discourage the exchange of key money.

So what should you do if you can’t afford to pay KD300,000 key money for your small café business? Well, you could always focus on a different set of customers that exist somewhere else more affordable. For example, having your café somewhere dead but behind some office buildings and sell to them directly through delivery. Maybe you could encourage complimentary businesses to join you in a new place where you can start a new trend in that area. Alternatively, you could start another business you’re passionate about that’s more cost effective to start. In this case, key money was your ‘barrier to entry’ in marketing terms. Tip: Taking a loan to secure key money is not something I would recommend as you’ll needlessly give yourself sleepless nights and probably a stomach ulcer thinking about all the ‘what ifs.’

Post by Loaay Ahmed, a strategic business therapist since 1995. He currently lives and works in London, UK, while earning his master’s in Service Design and Innovation, and managing knightscapital in Kuwait. For Loaay’s advice on business or work matters, send a short email to loaay@knightscapital.com. Regrettably, only the questions chosen for publishing will be answered.


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5 comments, add your own...


  1. RT says:

    this is a Pandora box… the rampant practice of key money for residential flats in Kuwait is breaking glass ceilings…

  2. Samer says:

    Emotional stock aside, is there a formula for calculating key money worth?

    • Loaay says:

      Similar to deciding a brand’s financial value, there are many factors that get involved. For example, how popular the location is; if there’s a demand from other companies for that particular shop; the key money for the shops next door; knowing the projections of how much revenue a particular business can generate from being in such a location; how much money the current ‘owner’ needs to make up for past losses; and the timing of the deal in relation to the economic and political situations. There’s an old saying, “Retail is Detail”. There’s an art to everything. Have the right people around you who have experience in real estate and others in your line of work when evaluating a location. If it works, great. If not, walk away. That being said, sometimes people can ‘feel’ something for a place and go for it, and against all the odds that say otherwise, they make it.

  3. sam says:

    Nice read, FYI new malls when you rent the shop they make you sign a contract so if you leave before the contract end you haven you pay the exit money ( exey) .
    I had a shop in alsalam mall and my business was not doing well so I had to leave I was surprised when I was asked to pay 7000 kd just as a contract breach fee which the company running the mall made me sign. Key money or no it is what it is when doing business in the gulf it all about consistency and luck ( al rezq 3ala allah)


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