VenturePORT Series - Your Location
Many entrepreneurs dream of having a terrific office or retail location designed by the finest architect, and hopefully you'll achieve your dream. Depending on what type of business you intend to start, this is also one of the first places you can cut corners in order to sell your way into business. The key to getting to breakeven and profitability is to do everything you can to reduce your fixed expenses of any kind. Those whose businesses involve a lot of public contact at their locations, either in retail or business-to-business, will probably need to pay a lot of attention to the location, because the premises in effect help define your brand. For those others of you who sell business-to-business, you really can often start your business in a garage, because most sales are conducted in your prospects' offices, not yours.
Key Considerations
To determine your space needs, you should have answers to the following questions:
- How much money do you have?
- How long of a lease can you sign?
- Do you have any kind of credit rating to support a lease or someone to co-sign?
- Will lots of customers be coming to your premises? If yes, what kind of customers — older, more formal? Younger, more casual?
- What do you need the space for — administration, storage, shipping, retail, machinery or computers, or a combination of these?
- What kind of Internet access or other communications do you require?
Ideally, you can get started in temporary quarters until you sort out the direction and trajectory of your business — that is, the speed at which it looks like you'll grow. It's quite common for a new business to change locations up to three times in the first two or three years. Moving is disruptive, but less so than having to file for bankruptcy or downsize because you took on more costs than you needed. Remember, anything you can do to reduce fixed costs when you launch your business will enhance your viability in the long run.
When selecting space, of course, you might like to consider access to public transportation and availability of high-speed Internet access. The average business can do perfectly well with high-speed access provided by your local cable provider, which often provides the highest speeds for the least amount of money, if available in the building. For those who prefer DSL provided by their local phone service, you also have to make sure it's available in your building.
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Leases
No matter what type of space you need, you will probably need a lease. Unless you have the cash to put down, with a demonstrated ability to handle a mortgage, you have little chance of purchasing your first location. It might make sense someday to own your premises, but probably not when you launch.
Getting a lease for a new business requires having a personal credit history, because few landlords will rent space without having someone with sufficient financial means to fulfill the obligations of the lease. This means being able to pay the rent for the specified time or comply with the terms of an exit clause, which usually means a responsibility to find another sub-tenant. Often, the space will need to be painted or customized or improved for your needs, and the landlord will provide this "build-out" as part of the lease. That's another reason they will insist on having someone with an established credit history sign the document.
Often, your best chance of saving money on a lease is to sublet space. This means taking over the lease of a company that needs to vacate the space before the end of its lease. You can often get more favorable terms because the tenant and landlord both want to get the space rented. Normally, in a sublet, you will not be able to get anyone to pay for improvements, and you will still need someone with a good credit rating to sign the lease.
Business leases tend to have multiple pages of difficult-to-understand fine print. It does pay to have a real estate lawyer look it over for danger signs. Watch out for the following:
- Personal guarantees: make sure you know what you are signing away.
- Ability to move within the building: You want a commitment that if you grow you can move up in the building.
- Ability to sublease — you want to make sure you have that explicit right and under what terms.
- Hidden expenses — make sure you know what you are paying for. There may be extra fees for property taxes, electricity, heat and air conditioning, cleaning, trash pickup, or recycling.
You will generally have to pay a security deposit of two to three months rent.
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Options
Depending on the nature of your business, you might have to consider retail, office, warehouse, or manufacturing space, or a combination of the above. Each type of space has its own characteristics and considerations which can have a direct impact on the productivity and success of your organization.
Retail. The No. 1 consideration with retail is location —the harder it is to get to your store or to park, the more you will need a truly unique product or creative marketing program to draw people. Another consideration is the types of stores nearby. Would they tend to attract the same potential clientele, or, to the contrary, scare them off — such as having a Harley-Davidson motorcycle shop located near your business oriented to senior citizens. The better the location, the more the cost. Sometimes you have to make trade-offs to get a better a location, such as having a less space than you ideally need, or an imperfect storage situation.
Consider traffic issues: Is it difficult to make a turn into the lot? Is a major construction program planned for that street? (You can check with the town hall.) What other development is planned in the area? The more you do your homework on that location, the better off you will be. Beware that retail leases have can have even more complexity and issues than an office lease, because it should address your rights in the event the landlord makes decisions that have a material impact on your foot traffic.
Office. In the spirit of keeping costs down, you have to ask yourself: Do you need a fancy office? If you are in a field in which you'll have clients visiting and impressions are key, then the answer is yes. You can hold down costs by getting shared office space in a growing number of commercial office buildings. These office center companies rent a big space, provide a receptionist, conference rooms, equipment, and then let individual companies take an office or two and use the facilities as needed. They do a good job of making the space look as if it's one company, even though you're one of 20 or more in the space, but of course you're not going to fool anyone, nor should you try.
Many businesses launch in so-called "incubator" buildings, generally old factories, warehouses, or sometimes homes, converted into office space for small businesses. Sometimes you get a little charm, but no fancy trappings. We know of a business owner in one such building who fretted when a major client from a Fortune 500 company insisted on visiting his premises. He did everything he could to make the tiny office look presentable, but he could do nothing, of course, to improve the appearance of the bare-bones old industrial building.
The client arrived at the office with a broad smile. When the business owner asked why, the client told him, "Because this building brings back great memories. It is where I made one of my first sales calls on my first job out of college." You may not be so lucky as this, but clients do understand that you're a startup and often have more understanding than you might think about your seeking to keep unnecessary costs down in the early phases.
Because an office is less dependent on visitors than a retail location, you can also consider trying to locate in a town trying to attract business with tax incentives. Your start-up might be too small to get attention, but it doesn't hurt to call the town's economic development office to find out what incentives, if any, they might offer you to start up in their town.
Whatever your location, make sure it is not in an area prone to flooding.
Warehouse and manufacturing. This kind of space can come very inexpensively in comparison with retail and office space, but has its own considerations to keep in mind. In addition to making sure the location is high and dry, and that the roof doesn't leak, you'll have to deal with such considerations as: What size trucks do you expect for deliveries and can that be handled by the loading dock and driveway? Is the space easily accessible to truck routes? You'll need to consider security, and how much of what devices and measures you'll need given the location of windows and skylights. Will you need an even more secure area in the location for sensitive shipments or equipment? You will have safety considerations in terms of proper handrails in specific locations, and you'll need to consider the space available for racks, pallets, and a forklift. Power to run your machines will be a key consideration, as will high-speed Internet access.
No matter what type of location you select, remember that you will know very little about the eventual path of your business, and that it could take any number of directions difficult to predict at the beginning. Lots of things are highly flexible in business, but real estate isn't one of them. In the early stages, you generally want to leave yourself as many options as possible so that you have flexibility to adapt as your business evolves.
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