By Mike DuBose
Selecting the right business location is one of the most important decisions that leaders from great businesses must make. It could also be your most costly decision, so be careful and take your time. Great companies like Walgreens know that location is crucial. Jim Collins described how Walgreens spends an inordinate amount of time and research to find the right store locations that maximize customer convenience (and thus profit).
There are multiple variables that play into selecting a good business location that matches your needs. At the same time, there could be hidden licensing, leasing, and zoning requirements and costs that may unnecessarily rob your business of profits. Locations vary dramatically from a home office for an independent consultant; to a retail location that needs high customer traffic such as a mall; to a wholesale business that requires a warehouse somewhere off the beaten path.
Your location can be the lifeblood of a business or the element that kills it. I have seen many good businesses fail because the owners located them in the wrong place or could not afford the lease. They blindly signed long-term leases containing hidden requirements with personal guarantees, thinking that success was right around the corner… only to find a 2X4 square in the face. Even when their businesses failed, the contract demanded that they continue to pay rent from their personal assets! Once you sign a lease, you are married to your landlord. If you signed a personal guarantee as part of the contract, the landlord could end up owning your home and other personal property as well. I have been through some real nightmares—even after conducting extensive studies to select good locations.
Where should you start? Your choice of a business setting is determined by the type of business you develop and the stage of its development. Many times, it is a matter of compromising between your personal and business needs and what space is available in your area. For example, the travel time to my corporate office is ten minutes so I don’t arrive at work all stressed out and ready to kill someone. While there were many variables that entered into my decision, one reason that I decided to build our conference center near my home was to avoid rush hour traffic. I have a corporate office there and maintain a second office at home where I am more efficient and have fewer interruptions. One neat thing is we strategically located our corporate headquarters beside our local FBI building so we have security 24 hours a day, seven days a week…free of charge!
I began my first retail computer business out of my home. As business grew, we expanded to a small commercial office, then to a larger one in the same building. When sales continued to grow, we moved to a mall setting and then expanded the business to a second mall location with extra storage room for our wholesale and other businesses.
I have leased ten properties over my business career, each with its own problems, rental issues, contract requirements, and landlord. For the time being, we are on top of the mountain in our new convention center, where our administrative offices are located. It is nice having a modern, high-tech facility for staff, but we had to go through a lot of pain to get here. And a meteor may strike the building tomorrow!
I want to share some helpful suggestions and help others learn from my mistakes. Though this book deals with all types of businesses, I had to share my tips on how to set up a home office. If you are not interested in learning about home offices, skip this section and go to the commercial office section.
Home Office: If you can, start in a home office and allow your business to grow at a reasonable rate. Many great business owners, like Bill Gates of Microsoft, began in their garages and homes. Ideally, you want to section off a part of your home or, better yet, dedicate a separate room to your business.
If your business does not pan out as you planned, your liabilities are limited. But if your business venture goes well and your budget allows, you should gradually expand into larger business settings. The positives of a home office include:
However, there are disadvantages as well, including:
The home office is ideal for a person who does not require face-to-face contact with a client in their office. This might include entrepreneurs such as a graphic artist, writer, computer programmer, accountant, website designer, small business consultant, or eBay salesperson.
Home Office Zoning Issues: You will need to review your city and county ordinances and neighborhood covenants. Zoning rules may prevent you from cranking up your home business, especially if you have a visible presence like customers visiting your home or business signs. I will never forget the sight of 50 people lined up outside my house to buy personal computers in December 1981!
When neighborhoods are developed, local governments approve guidelines written by the developer that residents have to follow. Every neighborhood I have lived in restricts residents from running small businesses from their homes. Call your county or city planning department, homeowner’s association, or the developer to obtain zoning laws and subdivision covenants. While most zoning restrictions are mildly enforced by law enforcement, a disgruntled neighbor could force you to limit or close down your business. For the most part, your neighbors will probably not object to your home business if it is done discreetly. If you post a business sign in your yard, increase auto traffic in the neighborhood where you live, have a line of cars parked outside your home, and have customers going in and out, then prepare for trouble!
When setting up your home office, don’t skimp on equipment. Buy up-to-date technology so your office can grow with your business for years. Avoid large, bulky desks and select a corner hutch or desk that is designed for computer equipment and takes up a minimum amount of room. It is a good idea to equip your office with a top-of-the-line, fast computer from a major manufacturer, a large power battery back-up 1500 AVR with surge protector, a 21” flat screen LCD monitor, a laser printer (w/25 pages or more per minute printing capability), a laser fax/copy/scanner, and a fast cable or DSL Internet carrier with wireless capability.
You can order a single telephone line called Ring Master that contains two numbers with two different rings (one for fax and one for voice). Of course, you can only use one number at a time, but it is probably rare that you are on the telephone and receive a fax simultaneously. This costs just a little more than a regular line. Be sure to obtain an answering service from your telephone carrier so you can check calls anywhere or have your messages forwarded to other numbers like your cell phone. Record a professional voicemail message—no screaming children in the background! I use a staff member to record messages because she has a pleasant and professional voice. I also suggest that you purchase a high-quality telephone such as the Polycom Soundpoint because it handles more than one telephone line, provides excellent speakerphone and conference calling capabilities, and maintains very good reception quality. If you want to be listed in the telephone book and Yellow Pages as a business, you will have to order a separate business telephone line which costs several times as much as a personal line. Avoid operating your business using your home telephone. It is important to appear professional, particularly if you are operating out of a home office.
I also went a step further in my home office by locating my library, a 42” flat screen high definition television, and a comfortable red leather couch there. I also installed a stereo system for my iPod so I can enjoy a combination home office, theater, and entertainment room.
Your greatest disadvantage when operating out of a home office is that some clients may perceive you as less credible than if you were located in a formal office. If your business cards list a street name with a “drive” or “court,” that projects a less-than-professional image. You may want to list a P.O. Box instead. I once provided business counseling to a human resource consultant who felt that she had lost several large contracts because she worked from a home office. Her credibility and long-range survival were in question. She relocated her office in a prestigious law firm building and subleases from the landlord for a few hundred dollars per month.
I believe that the positives of a home office heavily outweigh the negatives, but you should carefully consider all aspects to decide if this is a good fit for you and your business.
Commercial Office: If the home office is not the best avenue for you to take, then consider setting up a professional office when you hang your shingle out for business. The location of your customers should drive your decision on the geographical location. For example, if most of your customers are located downtown and you need to see them face-to-face in an office setting, then your search should begin there. I always recommend that you blend your customer base to your corporate location. However, I would give up $10,000 in salary per year to not have to drive two hours each day in stressful rush hour traffic! You also want to locate your office near where you and most of your employees live if you have an existing business.
There are a variety of ways to find office space, including:
Retail Office: Steven D. Strauss says, “If your business will be a retail store catering to the public, if there will be a lot of spur-of-the-moment drop-in customers, then a high-profile, high-traffic location is vital.” Choosing a retail location is more difficult, requires more analysis, and will be more expensive than locations where customer traffic is less important. You have two choices: either pay top dollar to locate your business where there is a lot of customer flow (for example, a mall location), or situate your business in a less-traveled area with lower rents and draw your customers in through advertising and marketing.
I suggest that you secure the services of a real estate or small business expert to help guide you in your selection. They will be able to give you unbiased input—unless they are being paid on a commission, in which case they may steer you to properties where they will make the most money. I prefer to employ an independent consultant who has no vested interests in what I do other than to assist me in making good business decisions and who will bluntly provide me with the pros and cons of different location possibilities.
Also, look where your competitors are located. They may have already conducted research that provides you with clues on where to locate. Many small business experts are now recommending that you consider locating your business near competitors because you can dovetail under their marketing and advertising. Let’s imagine a customer visits a competitor’s restaurant because of the competitor’s expensive newspaper ad. Now, imagine that your business is located next door. Customers may come to your restaurant when the competitor is extremely busy with long waits or may remember seeing it and want to try it the next time they come to that location. I observed this in Hilton Head Island, South Carolina, where many customers were not willing to stand in long lines for a certain restaurant and started to look around for other nearby restaurants to satisfy their hunger. I also noticed that business was booming for a great ice cream shop located right in between four restaurants! The ice cream shop used the group of restaurants and other retail stores in the strip mall to draw customers. They were all feeding off of each other.
Many large retailers like Home Depot and Lowe’s are also located within a stone’s throw of each other. If I cannot find something at one store or want to do some comparisons, I will travel a few blocks to the competitor’s store. Therefore, locating near your competitors can yield positive results.
On the other hand, be careful about locating your business near too many competitors. When visiting New York City’s Chinatown, I must have seen 30 stores in a row offering the exact same merchandise! There was a price war going on and the profits were being killed in the process. In other words, locating near too many competitors can hurt you. You must be able to stand out from the crowd.
You will need to conduct your own research and make sure you look at a wide variety of options. Then, step back and question everything. Don’t rush this process! Debate the location with friends, colleagues, family members, consultants, staff, peers, and experienced small business owners. Push for critical debate and ask them to challenge all of your assumptions and strategies. Don’t give your plan to friends who think like you; rather, invite critical people to provide input. If and when you arrive in bankruptcy court, your nifty friends who agreed with your failed plan will not be there!
Commercial property prices vary according to a lot of factors: the area the building is located in, the age and condition of the building, the services that are included in the lease (i.e., utilities, landscaping, and janitorial services), traffic flow, taxes, renovations and repairs by the landlord, popularity, crime and police protection, occupancy rates, and supply and demand.
The first item on your list is to look for high customer traffic flow. Most local governments have a planning commission that can assist you, and your state department of transportation may be another resource. Each state also has a data center, which you can find on www.census.gov. For a small fee, they can provide you with extensive information on your target area, including crime, population, and other statistics. They can customize the data to census tracts or small geographical areas such a group of neighborhoods and can refer you to other experts. The web site www.economy.com also offers statistical information that can be helpful.
When you narrow down your search, park your car near the location and observe for an extended period of time on different days of the week. As Jan Norman notes, “Each location has a personality that affects your business.” Make sure that the appearance of the building and the neighborhood it is housed in mesh with the image you you’re your business to project.
Sometimes, traffic flow statistics cannot capture hidden problems. Look out for barriers that limit access to your proposed location. I recently visited a very popular fast food restaurant, and the product I ordered was excellent. However, once I was ready to leave, I could not turn left into the four lane highway to return to my office because of the extensive traffic. That left an impression that decreased the likelihood of me visiting the restaurant again. You may be considering a mall location because the numbers for the traffic flow show that it is very busy. But only through observation can you determine if drivers actually come into the mall. Once, I rented a great mall outlet for one of my businesses at a good price. The facts documented that there was a high volume of drive-by traffic; however, these drivers were not turning into the mall where my business was located! This shows that sometimes leasing or rental prices should not heavily weigh into your decision and facts can lead you down the wrong path.
It is important to interview store owners and managers in your target area to get a feel for problems and issues they have with that location. I once rented a mall location that was exactly what I wanted when I signed the three-year lease. However, six months after I moved in (thinking I had made a wise decision), the large anchor store that attracted a lot of business to the mall moved to another location. Then, the nearby movie theatre that attracted a great number of customers went out of business. Of course, Murphy’s law rang true and a third anchor store moved out as well. Those three events all hurt my business and the mall eventually died—but I got a good deal!
One of the keys to a successful lease is to get as much out of the deal with the lowest rent and the least amount of liability as you can. The landlord will try to squeeze as much out of you as possible. Norman warns that “an unfavorable lease can kill a new shop.” Again, don’t rush the process. The key to negotiation is to let the other party think you have another option to make them want your business. Strauss notes that finding good tenants can be hard for a landlord and that the he or she “probably wants you as much as you want the space. Accordingly, you may be in more of a power position than you think when negotiating a lease and thus can ask the landlord for concessions and changes to the lease, if required.”
If you fail to meet your contractual obligations under the lease, you will be introduced to a friend of the landlord: his lawyer! That friendly leasing agent you met when you were negotiating the lease early on will disappear. Several times when I have run into trouble with my businesses, I have heard, “It is out of my hands now!”
Here are some issues you need to consider when investigating your location and negotiating with the landlord:
Turn your investigation into a series of great decisions that you will smile about when you remember it down the road. When my computer business failed, I was so glad that I had refused to sign personal guarantees when I signed the lease agreement and all of the responsibility fell onto a corporation with no assets. However, in good faith, I settled with the landlord for a reasonable amount of money, even though I was not required to do so. I just wanted to leave the partnership with both parties feeling good about the settlement and knowing I had done the right thing.
Building a commercial building: Another choice is to build your own commercial office building. Some small business owners build a larger facility than they need and lease the remaining portion to pay their monthly mortgage. Building a commercial building is very complex, so employ an experienced commercial architect to help you design and supervise the building of the facility if you choose this option. Architects generally charge between five and seven percent of the total cost of the building. However, it is well worth the money! You will then want to bid your project out to the three top commercial builders in your area. When you are developing the budget for a commercial building, don’t forget that the bigger the facility, the more the taxes, insurance, repairs, and maintenance will cost. Buildings depreciate in value over a 30-year period, but the land you purchase is not depreciable nor can it be written off on your taxes as a business expense.
Business Licensing: Where you locate your business may dictate whether or not you have to obtain a business license. Some states like Delaware require a state business license. My businesses are located in South Carolina (which does not require a business license). However, if my corporation goes into Delaware to provide part-time consulting work, I have to not only obtain a Delaware business license, but file a Delaware business income tax report as well (of course, it costs money to get a license and file another tax return). Next, you have to look at the regulations for your city and county. They may also require a business license and you are often taxed according to the level of gross income. This is a way to generate money and pay for government services for which you receive little in return.
Government entities enforce these types of rules by passing laws that others cannot do business with you without your business license number. Enter licensing fees into your equation when examining the pros and cons of possible business locations. I located my businesses in a county and state where no business license is required. Even then, we pay nearly $50,000 annually in county property taxes alone for our building. Also, be sure to examine the sales tax for the county. This is another area that will chip away at profits.
In closing, use my “CCP Theory”—be careful, cautious, and paranoid—when choosing a business location. Above all, don’t rush this decision! Great companies plan their futures—and locations—carefully.