For many businesses, business location is an essential component in its eventual success or failure. Site selection can be pivotal in all sorts of businesses, including retail, service, wholesale, and manufacturing efforts. Poor location is one of the primary causes of business failure. Conversely, a good business location can be enormously beneficial. Sometimes, a business that might otherwise be only marginal makes a good profit because of an excellent location. On the other hand, a poor location can often drag down a good business. It can affect sales adversely and help decrease the company’s profit by adding to its cost.

Location Options

Businesses have a number of different choices in the realm of the selection. The type of facility most often embraced by retail and many service establishments is the shopping center. The shopping center, which houses a variety of different stores (often including well-known chain stores), can take several different forms, but the best known of these is the mall. These establishments provide their tenants with a large number of potential customers and professional marketing  and maintenance services, but in return, tenants often pay high rent and additional fees (to cover maintenance costs, etc.).

Many other small businesses, meanwhile, are located in small shopping centers that are sometimes known as strip malls or neighborhood shopping centers. These centers which rely on a small customer base than other megamall cousins are typically anchored by one or two large supermarkets or discount stores.  The rest of the stores are usually small retail or service establishments of one type or the other. The rent at strip malls is generally mush less than it is at major malls, but of course, the level of traffic is generally not as high either. 

The small business owner who wishes to establish his or her store in a shopping center must carefully weigh the financial advantages and pitfalls of each of these options before moving forward.  Other retailers or service businesses prefer to set up their businesses in freestanding locations. Restaurants, for instance, often choose to set up their business in a lone building, attracted by the lower fixed rent that often accompanies such arrangements.  

Another facility option for a business owner is the business park or office building. Indeed, many professionals (doctors, architects, attorneys) choose this option, attracted by the professional image that such trappings convey and the ability to share maintenance costs with other tenants. Some service businesses also operate from these facilities, especially if their primary clientele are other businesses.

Other Factors in Business Site Selection

There are myriad factors that need to be evaluated when deciding where to locate a business. Settling on a site that is both convenient and comfortable for the company’s primary customers is, of course, vital, but that is only one piece of the site selection puzzle. These considerations include:

  • Will projected revenue cover the total costs of leasing or purchasing the site? 
  • Will ancillary costs associated with business establishments or relocation (purchase and/or transportation of equipment, computer wiring requirements, etc.) be prohibitive?
  • Will it be possible to secure lenders to help cover costs associated with moving into the new business site?
  • Are there restrictive ordinances that will unduly interfere with business operations?
  • Is the facility itself in good condition (including exterior and interior), and does it meet layout requirements? If not, how expensive will refurbishment be?
  • Are the grounds (landscaping, light fixtures, drainage, storage facilities) in good condition?
  • If sharing costs of maintenance/housekeeping services, do other tenants view services favorably?
  • How secure is the facility?
  • Is the site large enough for your business?
  • Can the site accommodate future growth?
  • Are nearby business establishments successful, and are they likely to attract customers to your business?
  • Are regional competitors successful?
  • Does the site provide for adequate parking and access for customers?
  • Might the area surrounding the facility (neighbor lots, parking facilities, buildings) undergo a dramatic change because of sale and/or construction?
  • What sort of advertising expenditures (f any, in the case of malls, etc.), will be necessary?
  • What sort of leasehold improvements (if any) will be necessary?
  • Will customer service be interrupted by relocation? If so, how long?
  • Will major system changes (additional or subtraction of equipment or processes) be necessary?
  • What impact will the business site have on workforce needs?
  • Should the choice of facility reflect changes in the industry or market in which you are operating?
  • Are there any existing or proposed government regulations that could change the value of the facility? What is the climate as far as business taxation is concerned?
  • Are important suppliers locate nearby?

Ownership vs. Leasing

Whether starting a new business or moving an already established one, business owners are faced with the question of whether to lease or purchase the land and/or facility that they choose as the site for their company. Most businesses operate under lease agreements (indeed, many business owners do not have the necessary capital to buy the facility where they will operate), but some do choose to go the purchase route, swayed by the following advantages: 

  • Increased sense or permanence and credibility in the marketplace
  • Property taxes and interest payments are tax-deductible
  • Facility improvements increases the value of business’s property rather than the landlord’s property
  • Increased net worth through appreciation of both the business and the facility (including land and buildings)
  • No forfeiture of asset at the end of term
  • Ability to liquidate (lessors often have far less freedom in this area)

Of course, there are also factors associated with ownership that either convince business owners to stick with lease agreements or preclude ownership as a viable option.

  • Risk that value of the land and/or facilities will actually go down over time because of business trends (a neighboring anchor store goes bankrupt) or regional events (a flood, massive layoffs)
  • Financial risks associated with purchasing are greater, and put greater financial drain on businesses that often have other needs (purchasing typically requires greater initial capital investment and entails higher monthly costs)
  • Property can be claimed by creditors as an asset if the business goes bankrupt

Planning for the future

An important factor that business owners need to consider when weighing various business location alternatives is the site’s ability to address the company’s future needs. Some owner/managers find that, as time goes by and their competitive position worsens, they can afford relocating even less. They learn the hard way that if a company stays too long in a location it can die in that location. Even a company that is performing satisfactorily can benefit from regular reviews of the pros and cons of its location.

What about technological improvements?  Have you ever thought that, if you move, you could take advantage of the technological improvements that have come along in your industry since your present facility was built?  If your facility has become a competitive liability because of such innovations, moving to another building may be the most economical way to become competitive again.

Most business consultants counsel their clients to do two things to avoid getting stuck with an inadequate business facility and/or location:

  1. Plan  for the future, and 
  2. Pay attention to the telltale signs that are often buried in the business’s balance sheet.

Facility costs are a normal everyday concern, but their relationship to other operating and overhead expenses can alter gradually in ways that, once perceived, suggest a facility change. Rent, operating expense, maintenance, taxes, insurance, etc., should be monitored as a percent of one or more preferred productivity measures to serve as a good indicator of the need for facility change. 

Bernard Taiwo

I am Management strategist, Editor and Publisher.

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Tue Feb 9 , 2021
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