Where The What and How of Small Business Startup Series · Location. Location. Location. While one...

Choosing the Best Location for Your Business

Smal

l Bus

ines

s St

artu

p Se

ries

Jane Haskins, Esq.

The What and How of

Where

Introduction 03

1. Home or Away 04

2. Leasing vs. Buying 10

3. Evaluate Your Options 15

4. State Considerations 20

Summing Up 23

Table of Contents

The What and How of Where 02


Imagine two coffee shops. One of them has a line out the door every morning, as office workers fuel up for another day. The other, two blocks away, is lucky to see five customers before noon.

They serve the same brand of coffee and charge about the same price for it. What makes one business a huge success, while the other struggles to pay its rent?

Location. Location. Location.

While one shop has a prime spot between two office towers, the other is tucked away on a side street that doesn’t see many pedestrians. The rent is cheaper there, but that doesn’t compensate for the fact that there’s simply not enough business. Before long, the side street coffee shop will have to close its doors.

Location can make or break a small business. But choosing a good location isn’t always easy. You must consider finances, the type of space you need, marketing plans, zoning, accessibility, and the competition. This guide will walk you through some of these issues and empower you to ask the right questions and make an informed decision.

We’ll start by discussing the advantages and disadvantages of different types of business locations—from home offices to brick-and-mortar stores to traditional office spaces. Then we’ll talk about evaluating locations, leasing versus buying, and choosing a state in which to form your business.

Introduction

1

Home or AwayAlthough “business location” most often refers to a retail store, restaurant, or office suite, specialized business types may require different sorts of work spaces, like garages, production facilities, warehouses, and studios. When it comes to very small businesses, more than half are home-based.


Working From HomeSteve Jobs and Steve Wozniak started Apple Inc. in a suburban garage. Mark Zuckerberg launched Facebook from his Harvard dorm room. As of 2013, nearly 70 percent of small businesses were started from home, according to Small Business Trends.1

A home-based business has advantages:

• It’s cheap. You won’t pay maintenance fees or commuting costs, or incur rent and utility expenses beyond what you already pay for your home.

• It’s easy to have a flexible schedule. You can work early in the morning or late at night, or take a quick break to run the kids to soccer practice.

• It allows you to test your business’s viability. You can establish a cash flow before you commit to renting office or retail space.

• You can deduct your home-office expenses on your taxes. You can often write off costs like mortgage interest, a portion of your rent, and a portion of your utilities and internet access, if you meet certain qualifications.

1 http://smallbiztrends.com/2013/07/home-based-businesses-startup.html


All that said, a home-based business also poses special challenges:

• Legal issues. Zoning regulations may prohibit operating a business from your home, or you may need a permit or license. Contact your city or county to find out more about home-business regulations.

• Neighbors. Whether you live in an apartment or a house, your neighbors may complain if you have a steady stream of customers or delivery trucks, particularly if you operate outside of conventional business hours.

• Space constraints. You may not have enough room for both your family and your business.

• Projecting the right image. If clients or customers come to your home, it becomes part of the image your business projects. Pets, children, noise, or the wrong decor can detract from that image. Be realistic about these challenges and your ability to manage them.

• Family distractions. Spouses, children, and the unwashed laundry can be powerful distractions. Consider whether you have the self-discipline and family dynamic to stay focused on your work.

If you like the idea of a home-office but are concerned about image or distractions, a part-time virtual office or coworking space may be a good solution.

A virtual office package can give you a business address, receptionist, and place to meet clients, even though you do your actual focused work at home. Coworking spaces are increasing in popularity and typically offer workstations, conference rooms, free coffee, and places to network and collaborate.

Hom

e A

way

Fro

m H

ome


You might be in a situation where you can conduct your business online so all you need is a website. However, even if you must have a brick and mortar location, it’s still important to invest in an online home for your business. Let’s face it: these days if you don’t have a website, you don’t seem as credible.

When deciding to build your company’s website yourself, you have to consider several factors, includ-ing the time it will take to do so (thus taking you away from other areas of your business), cost, and brand-ing opportunities, among others. Although there are DIY options for just about every area of your business from accounting to legal, these are rarely as effective as hiring a professional.

Having your own website, rather than solely using a third-party service such as eBay, has several distinct advantages, including:

• You have greater control over your content and branding.

• You can attract more search engine traffic and eventually build an email list.

• You won’t be subject to another site’s ever-changing policies, terms, and conditions.

• Your business seems more credible, which is particularly important if you will be conducting monetary transactions—customers won’t want to give their credit card info to a site that doesn’t appear trustworthy.

Depending on your business needs, building a company website—especially one that processes financial trans-actions—can cost more than selling on eBay or Etsy, due to the legal and technical requirements you must meet.

With those thoughts in mind, you can use this flowchart to help you decide how to build out your website: either by hiring a professional developer, creating it yourself, or making use of an existing e-commerce platform, such as Etsy. Try not to get too intimidated. You can always start small and create one yourself and then upgrade as your business grows.

Your Online Home


If you won’t be setting up shop in your house, you’ll need to buy or lease a business location. Doing so can be a daunting process, but it helps to start by clarifying what you need. Here are some of the types of business spaces that may be available:

• Retail space. If you will be selling products or certain types of services (such as hair care or dry cleaning), you will need a retail location. A brick-and-mortar store provides visibility and an opportunity to use signage and decor to “brand” your business. However, brick-and-mortar stores can require a substantial financial commitment in terms of a long-term lease and staff. You may have to take on debt just to get started.

• Office space. Your business may need a full office suite with workstations, offices, and places to hold meetings with staff or clients. But you may have more modest needs. Consider where you actually do your work and what you need an office for.

• Office parks. Office parks can accommodate a variety of uses, from retail to office space to warehouses. An office park might be a good option if you need office and warehouse space, if you are a one-of-a-kind business that people will visit no matter where it’s located (such as the only bike shop in town), or if your customers don’t come to your location (for example, you’re a plumber or an online retailer).

Other Types of Spaces

If you can’t afford retail space right away, selling online, at festivals and farmers markets, through trunk shows, or in short-term “pop-up” locations can be good stepping stones to a brick-and-mortar shop.


• Restaurants, cafes, and bakeries. Commercial kitchens have special requirements, and a location that already has the necessary kitchen facilities built to code will usually be cheaper than starting from scratch.

• Industrial and warehouse space. You may need an industrial space because you are manufacturing or shipping goods, or you may find potential in retrofitting an old factory or warehouse for another use, whether it’s an artist studio or an indoor mountain bike course.

Once you have an idea of the type of space you are looking for, you can consider whether to lease or buy.

Realtors don’t typically get involved in residential leases, but the same isn’t true of commercial ones. Owners of commercial properties typically list their rentals with a realtor or broker, who then earns a percentage of the ultimate rent as commission.

Owners’ realtors are obligated to protect the interests of the owners, and that means they’ll want a lease that favors the owners, not the tenants. One way to protect your interests is to hire your own realtor to help you find and negotiate a commercial rental agreement. Working with a realtor has several advantages and drawbacks:

Pros • A realtor can save you time, since a good realtor already

understands the market and the properties that are available that would suit your needs.

• Commercial leases can be complex and hard to decipher, but a good realtor can spot hidden costs and lease terms that are not in your best interest. Many business owners are uncomfortable negotiating, but realtors negotiate leases every day.

• A realtor may have access to market data that is not available to the public.

Cons • You may have to pay your realtor a substantial commission,

though the commission is also often paid by the building owner.

• Because a realtor receives a percentage commission, he or she has some incentive to “rush” the deal and lock you into a high-rent, long-term lease.

Many business owners decide that the potential conflicts of interest are far outweighed by the negotiating power and inside information that realtors can provide. Consider hiring a commercial real estate lawyer to help you understand and negotiate the lease.

Usi

ng a

Com

mer

cial

Rea

ltor

When shopping for business space, you face a crucial question: should you lease, or should you buy? Most new businesses lease space because it requires less money upfront and offers more flexibility if the business needs to move or close down. But buying can give you more control over your space and may make for a more sensible long-term investment.

Leasing vs. Buying

2


A commercial building can be a good investment. Your business can occupy the building and pay down the mortgage instead of paying rent. Or you can lease part of the building to other businesses, creating an income stream that will help with the mortgage payments. However, owning limits your flexibility and poses greater risks than leasing.

Consider these factors when deciding whether you want to pursue ownership:

• Your assets and credit history. A commercial building requires a substantial down payment and good credit to get a low mortgage rate. If your business does not have credit, you will have to rely on your personal credit, and you will almost certainly have to personally guarantee the mortgage, which places your personal assets at risk if you default on your loan. To minimize your risk, you should have

enough money to continue paying the mortgage if your business slows or you are unable to find tenants in an economic downturn.

• Your cash needs. Real estate is an asset, but unless you have excess equity to draw on, you can’t use your building to make payroll, buy new equipment, or finance an expansion. Consider whether buying a building will limit the funds available to grow your business.

• Your risk tolerance. Like all real estate, a commercial building’s value can fluctuate, depending on the economic climate and your location. It may soar in value, or it may be worth less than you owe on it. If you rent part of the building, your tenants may leave, and you may have a period of uncertainty as you look for new ones. Be sure you are willing to accept these risks.

The Pros and Cons of Buying a Building


• Your future plans. Buying can limit your choices if you decide to expand or relocate. In general, it’s easier to lease a new space than it is to sell a building.

• Your ability to manage a building. When you rent, the landlord takes care of maintenance issues, but when you own, the burden is on you. If you rent out part of the building, you will have to attract tenants, collect rent, and deal with their concerns. Be sure you have the time and inclination to take on these added responsibilities.

If you are a new business owner without a lot of capital, you may be better off renting at first, then exploring purchasing options after your business is well-established. If you do consider buying a commercial property, be sure to carefully analyze the commercial real estate market and understand both the risks and the benefits of ownership.


If you have rented a house or apartment, you have some experience with leases and landlords. But commercial leases are different than residential ones—they usually extend for a period of years and may include certain building maintenance costs.

A commercial lease prepared by a landlord almost always favors the landlord. For this reason, you should always negotiate the terms of a commercial lease. Your negotiating position may be better if there is a large supply of rental space and low demand. You may have less success if you are in a popular area where there is little available space.

Before signing a lease, be sure you understand these issues and negotiate where appropriate. You may also want to consider hiring a lawyer to review the lease and help with negotiations. Even though it may take a few hours for an attorney to review a lease, most business owners will find that an attorney will save them money in the end, either by helping with negotiations or finding an issue in a clause. At the very least, having an attorney on your side can give you peace of mind that you’re not overlooking potential loopholes that will haunt you down the road. In some cases, a commercial realtor may also be able to help (see sidebar: “Using a Commercial Realtor,” page 9).

Understanding Commercial Leasing

Your negotiating position may be better if there is a large suppy of rental space and low demand.


Issues to consider when reviewing a lease are:

• The amount of the rent, and whether it will go up over time

• Your responsibility for utilities, cleaning, and maintenance in your own space

• Restrictions on your ability to make changes to the space

• Whether or not the landlord will give you an allowance to configure and finish, or “build out,” the space, or to replace items like carpet and paint

• Your responsibility for maintenance, taxes, insurance, and other building costs. Commercial leases are usually structured so that the tenant pays a portion of the overall building expenses in addition to rent. The terms “gross lease,” “full-service lease,” “net lease,” and “triple net” refer to the way the lease allocates these expenses between you and the landlord.

• The length of the lease. Commercial leases usually run from two to 10 years, with five years being average. If your business is new, you may want to negotiate a shorter term to provide flexibility and minimize risk.

• Other restrictions, such as constraints on signage and parking

Commercial leases are complex legal documents that can be hard to read and understand. They can include hidden costs and difficult-to-decipher terms that could cost your business thousands of dollars. A commercial realtor (see sidebar: “Using a Commercial Realtor,” page 9) or commercial real estate lawyer can help you better understand and negotiate the lease.

3

Once you’ve decided on the type of space you need and whether you want to rent or buy, you can begin to investigate neighborhoods and evaluate specific locations. Here are some tips on picking the right part of town and on sizing up available locations.

Evaluate Your Options


It’s important to do your research before you choose a brick-and-mortar location, whether it’s a restaurant, retail space, office, or warehouse. You don’t want to sign a five-year lease only to realize you’ve chosen a crime-riddled neighborhood or signed on for a two-hour daily commute.

To avoid these sorts of problems and narrow your choices, identify the types of neighborhoods that will best serve you and your business. That might mean pinpointing certain parts of town or clusters of other businesses you’d like to be near. Some factors to consider:

• The neighborhood vibe. Your neighborhood should be consistent with your company’s image and the kind of customers you want to attract. You wouldn’t choose an industrial park for a high-end boutique, no matter how much cheaper the cost per square foot might be. A kids’ karate studio would be much more convenient for parents if it were located near schools, rather than downtown.

• Nearby businesses with similar customers. You might not want to open a coffee shop next door to a Starbucks, or a yoga studio next to a noisy bar. But the yoga studio might do well alongside a natural food store. Placing your business near a retailer that attracts a similar demographic can sometimes help both businesses bring in more customers.

• Marketing potential from other neighbors. Locating near similar or complementary businesses can also provide referral business, give you someone to bounce ideas off of, or create marketing opportunities. For example, two accountants in the same building might consult with one another on difficult cases or refer business to each other. Businesses in the same block might cosponsor a charity event.

Step 1: Find a Neighborhood That Suits Your Style


• Foot traffic. If your business depends on walk-in customers, visit the location at various times of the day and week and notice who walks by. Are there enough people for your business to get additional customers through foot traffic?

• Cost. If your budget is modest, you may have to rule out certain high-end neighborhoods.

• Financial incentives. Your state or local government may offer grants, tax breaks, or other incentives to open a business in a particular locality. Your local economic development office or small business resource center may provide more information. If you live close to a state line, there may be financial advantages to choosing one state over another. (See “Where to Form Your Business: State Considerations,” page 20).

• The commute. Consider how long it will take you and your employees to get to work each day. If you will be hiring new employees, make sure there is a sufficient labor pool within reasonable commuting distance. Rent may be cheap at a rural warehouse, but you may not be able to find enough people willing to accept a long commute.

You might find it useful to make a list of the criteria you are looking for, and any areas or types of properties that you will not consider. The list can help you stay on track as you look at locations.


Before you start looking at locations, you should know how much you can pay in rent or mortgage payments and how many square feet you need, both now and in the next few years. While these two criteria are obvious, there are also some less obvious—but critical—issues to consider:

• Zoning and permits. Make sure your new location is zoned for the type of business you plan to operate. Contact your local government offices or an online licensing service to find out if you will need any special permits or licenses.

• Other lease terms. See “Understanding Commercial Leasing” on page 13 for a discussion of commercial leases.

• Safety and security. Consider the safety of the neighborhood and the building’s security features. Your costs will increase if you have to take additional steps to prevent theft or to keep your employees safe while working after hours or walking to the parking lot.

• Infrastructure. Make sure the space has sufficient electrical power and outlets, internet connectivity, and heating and cooling. It should also be able to accommodate any equipment you have.

• Accessibility. Evaluate the location from the perspective of your customers and employees. Pay attention to issues like parking, handicapped access, convenience to public transportation, access for delivery trucks, and whether the building is easy to find. Also make sure you will be able to access the building during the hours and days that you need to.

Step 2: Evaluate Locations


• Ability to make modifications. If you are leasing, talk to the landlord about any renovations you’d like to make, and be sure you have advance approval in writing. If you are buying, check with your city or county to find out about restrictions, building codes, and permitting requirements.

• Potential for expansion. Find out if you can lease additional space if your business grows.

• The landlord. A commercial landlord should be professional, reasonable, and responsive to

maintenance issues. Unfortunately, there are horror stories of landlords who neglect the property or make their tenants’ lives miserable. If there are other tenants in the building, ask them about their experiences.

Many business owners enlist a commercial realtor to help them find and evaluate locations (see sidebar: “Using a Commercial Realtor,” page 9). Whether you use a realtor or do it on your own, bring along a checklist to make sure you have thoroughly assessed everything that’s important to your business.

4

In addition to a physical location, businesses have a legal location: the state where the business is officially formed. You can set up a corporation or limited liability company in the state where you live, or you can form the company in a different state even though your store, office, or other place of business physically operates in your home state.

State Considerations


Choosing a StateThe most popular out-of-state business home for corporations is Delaware, which has corporation-friendly laws that allow for more flexible management and greater privacy than some other states. Delaware has an unusually well-developed body of corporate law that helps corporations predict outcomes of disputes and decide on strategy and settlement.

If you have a small, local business, you are probably more concerned with cost and convenience than with litigation strategy. You will probably find it cheaper and easier to incorporate in the state where your business is based. Here’s why:

• If you form your business in another state, such as Delaware, you will have to register to do business as a “foreign business entity” in the state where you are physically located. That means filing additional forms and paying a fee in your home state.

• You must have a “registered agent” in the state where your business was formed and in any state where it is registered to do business. The agent must have a street address in the state and be available during normal business hours. While you or an employee can act as the registered agent in your home state, you will have to hire a company to provide registered agent services in a state where you are registered but don’t have a business location.

• Many states require businesses to file annual reports and pay annual fees or taxes. If you form your business in another state, you will have to meet the requirements for that state as well as the state where your business is headquartered.


These additional responsibilities can add up to several hundred dollars a year. However, in some cases, such as the following, it may make sense to form a business in a state other than your home state:

• You haven’t picked a state for your physical location. If you are close to a state line or for other reasons are deciding between two states for your physical location, investigate fees, taxes, and reporting requirements in each state. For example, an Arizona limited liability company doesn’t have to pay annual franchise tax or file an annual report. But if you set up an LLC in neighboring California, you must pay a minimum $800 annual franchise tax.

• You will have physical locations in more than one state, such as store in one state and a warehouse in another. You will be responsible for annual fees and reporting in both states, but one state may be a better choice as a corporate home. A business lawyer or accountant can help you decide.

• You plan to seek outside investment. Venture capitalists and angel investors often prefer Delaware corporations. Incorporating in Delaware sends investors a message that you are a national company that understands their preferences.

Once you’ve decided where to form your business, you can prepare and file business formation paperwork yourself, use a company that provides affordable business formation services, or hire a lawyer to handle the process for you.


Summing Up

Choosing a location for your business is an important decision for any business owner. Make sure you choose a spot that meets both your needs and your budget. Some of the most important steps include:

• Deciding whether you can or should base your business in your home.

• Choosing the type of space you will need: retail, office, warehouse, or something else.

• Deciding whether you want to lease or buy.

• Choosing a part of town. Look for areas that are convenient and a good fit for your type of business.

• Assessing your budget and the amount of square footage you need.

• Evaluating each location, using the criteria that are most important to your business. Be alert to potential problems with security, parking, zoning, infrastructure, or lease restrictions.

• Having a clear grasp of the terms of your lease or other contract before signing it.

Finally, don’t neglect the legal side of choosing a business location. Forming a corporation or limited liability company in your state can protect you from liability and offer tax advantages.

If you’ve done your homework, you’ll be set for success.

About the Author

Jane Haskins, Esq. is a freelance writer who practiced law for 20 years. Jane writes website copy, blogs, articles and whitepapers for businesses that want to make an impact with their content. She has litigated a wide variety of business disputes and has represented small businesses in startup, dissolution, and business transactions. Visit Jane’s website at www.janehaskins.com.

Want more insights on starting a business?

Visit our Knowledge Center online or sign up for our monthly newsletter.

If you’re ready to get started on your business or would like to speak with an attorney through one of our legal plans, reach out to us at [email protected].

Call now or visit us online

(855) 993-6439

www.legalzoom.com

Thank you.

LegalZoom is not a law firm or substitute for an attorney or law firm and does not provide legal advice or services.

Legal help is here

Where The What and How of Small Business Startup Series · Location. Location. Location. While one...

Documents

Transcript of Where The What and How of Small Business Startup Series · Location. Location. Location. While one...