Largest Coworking Companies
So you’re an entrepreneur with a dream. Or a landlord with some buildings. Or an entrepreneurial landlord with some buildings and a dream.
Either way you’re considering launching a coworking space and figuring out how the numbers stack up.
There are a number of questions to consider, but they all amount to the same thing:
Will the space make a sustainable profit?
This article is intended to help you answer that question. We’ll take a look at what you need to cover to build a financial model you can have confidence in.
And that's what business plans and financial models are all about - confidence.
Confidence you've got the numbers in the right ballpark, so you can happily take on the commitment of a lease and the fit-out.
The core things to cover are:
There’s a lot more you could include on the financial side (balance sheet, cash flow). And a full business plan might also need things like SWOT analysis, brand positioning, and breakdown of marketing channels.
But for the purposes of this piece we’re just going to focus on the key commercials.
In order to have an idea of pricing, you’ll need to have a rough idea of who your target market is and what you’ll be selling them (private offices vs dedicated desks vs hot desks). The easiest way to start that process is to ground it in some good old-fashioned competitor research.
Of course, you don't need to be constrained by the competition and what has/hasn't worked for them. But it's certainly helpful as a starting point to figure out your customer, product, and pricing.
As well as looking at workspaces in your geographic area, it’s worth also looking at spaces that are of interest from the perspective of size (sq ft), operating model, target market, amenities offered, brand, and culture. This will be particularly important if you’re launching in an unproven location that doesn’t have any direct comparables.
There are lots of ways you could go about this, but reviewing coworking spaces on broker sites such as Hubble is always a good place to start.
Even if you haven't yet found a building it’s important to have an idea of how you will lay out the space. So come up with a number for the total sq ft that you think would be optimal to work with (e.g. 15,000 sqft), and go from there.
This ‘optimal’ size can act as the starting template for you to work off. When you find a building it’s unlikely to be exactly the same sq ft as your optimal size. Maybe a landlord shows you a 13,000 sq ft or 17,000 sq ft site. But as long as you have attributed a % to each specific space use, you can easily tweak the model depending on the actual building you find.
When you do look for a building you’ll be told the size in either GIA (gross internal area) or NIA (net internal area). I would always try to work off the NIA as it excludes internal walls and non-usable spaces, which can vary a lot from building to building.
You’ll then need to figure out how much sq ft you’ll be providing for the following:
The temptation will always be to put in as many desks as possible! But of course, the more cramped the workspace feels the less enjoyable the membership experience will be, and the harder it will be to fill. So getting that balance right is very important.
Once you know how you’re using the space, you’ll know what the capacity is in the building at any one time and therefore how many desks you can fit in. For example, if your optimal building is 15,000 sq ft, and your density is 70 sq ft per person, then that means you can have 214 desks.
Figuring out how many Dedicated Desk and Private Office members are available for sale is simple. You simply have the same number of memberships available as you have desks.
But figuring out the number of hot-desking memberships is a little more complex, because you can of course over book these seats, just like you would overbook gym memberships. And as well as the designated hot desks, you also have the overflow space in break-out areas.
The multiple by which you can overbook hot-desking memberships will entirely depend on your model. It could be anywhere between 125% - 300%. 300% assumes if you had 10 hot desk seats you could sell 30 hot desk memberships. This would be predicated off your hot desk members not using the space very much.
Once you know the total number of memberships available for sale, you’ll then need to estimate the occupancy.
Again, this will depend on your model. But a reasonable target is 85%. Remember that 100% is hard to achieve even with a waiting list. By nature flexible workspaces are easy come and easy go; so when a company does go you may not have much warning or time to line up a replacement.
Inevitably you’ll be playing a game of musical chairs - managing the incoming and outgoing companies.
There are a number of additional ways you can monetize your space, beyond merely selling coworking memberships. You’ll need to decide what’s included in the membership price and what members need to pay extra for. Here are some of the typical ways you might make additional revenue, beyond the desk memberships:
You can potentially achieve 10% - 25% additional revenue from these other sources. So it’s worth having a plan to include some of them, even if they’re not the backbone of your business.
Now you have an estimate of what revenue you’ll make, it’s time to figure out what the costs will be. For various reasons, it’s often helpful to separate the fixed property costs and the business operating costs.
So when it comes to setting up your P&L sheet, I’d recommend sticking the property costs under ‘Cost of Sales’ (COS) and everything else (all the business operating costs) in the ‘Operating Expenditure’ (OpEx).
On that basis...
These things would be included in the COS:
And all the other costs of operating the business would be included in the OpEx:
A word to the wise….flexible workspaces are typically quite operationally intensive. So even if you have a fairly low-touch model, you may be surprised by how much goes into successfully operating these spaces, and the associated costs.
One of the most common misconceptions among newbies to coworking is that you just need to ‘build it and they will come’. The hope being that if you’re in a prominent location, and you’ve built a great workspace, then people will just magically waltz through your door and sign up.
Sadly, even with a stellar workspace in a highly sought after location, you still need to get the word out and engage with your target audience. In other words, you need a marketing budget.
The cost of acquiring members is sometimes easy to track (e.g. if a large company who wants a private office comes via a broker or a paid Google Ad), other times it’s less easy to track (perhaps a freelancer takes a hot desk after they’ve come across a blog post you’ve written). But whether it’s easy or hard to track, there’s always a cost.
Knowing your ‘Customer Acquisition Cost’ will not only inform your marketing budget, but it will also help you track which marketing channel is working best once you launch.
Estimating how long it will take to fill the space at the beginning is important for two reasons.
Firstly - it’s necessary because there will be an initial shortfall of cash that you will need to allow for. Before the space breaks even your costs will exceed your revenue and knowing how long this could take will inform the size of the cash float you need to start off with.
Secondly - having a realistic estimate of how long the space takes to fill will help you not panic! Sometimes workspaces can take 2 years to reach maturity, but then once they do reach their target they remain steady and profitable. So knowing that will give you some cause for calm in the initial stages of growth.
Once you have figured out your revenue, property costs (COS) and operating expenses (OpEx) you’ll be able to calculate the profit (EBITDA):
(Revenue) - (COS) - (OpEx) = Profit
How many years you build out for the Profit and Loss sheet will depend on your model. But my guess is it needs to be somewhere between 5-15 years. Remember to factor in refurbishments (which will be necessary every 5-7 years).
It’s also a good idea to have a tab on your spreadsheet that also shows the P&L in £/sq ft. That will help you compare the profitability of different sized venues.
In terms of how much capital expenditure (‘CapEx’) is needed to get the project off the ground, here’s what you need to budget for:
This is obviously the biggie. And in honesty it’s hard to estimate it unless you have a real-life building to base your numbers on. Even then you’ll want to get some expert advice to give you cost estimates.
That said, you can of course get approximate benchmarks for the various components that make up the fit out of a coworking space. These components include:
(To see the difference between Category A and Category B works, check out this helpful visual guide).
The costs for the fit out will depend on the specification you need and the density you’re working to.
It will also depend on whether you want to take space that is in a ‘Shell and Core’ state (ie it needs all the work done on it) or whether you want to take space that has already had the ‘Category A’ works completed by the landlord.
As previously mentioned, you will have an initial growth period where your costs exceed your revenue. And you’ll need a cash float to cover this.
It’s a good idea to be conservative in your estimations, and to have a number of other levers you can pull should the space fill slower than you expected.
These are the costs associated with launching the site that aren’t anything to do with the fit out. They include:
If this is your first site and you’re setting up a coworking operation from scratch, then you’ll also need to factor in the following:
Inevitably, like any business plan, and no matter what level of forensic detail you go into, you’ll get some numbers right and some numbers wrong.
But as long as you come up with sensible estimates, based on benchmarks and a sound rationale, then you have every hope that you’ll find yourself in the right ballpark.
Good luck with it. And if I can help in any way (either officially or just a friendly chin wag) then please feel free to get in touch.
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