You’ve likely heard the common phrase “location, location, location” but how important is location when starting a business?
Choosing a business location is one of the more permanent choices small business owners make. Since the business can’t be moved without significant expense and trouble, making a quick decision without doing enough research may leave an owner with a location they may regret later.
Many new entrepreneurs choose spaces for the wrong reasons. Some like how a building looks or some feel that the traffic will support the business.
What questions should entrepreneurs before selecting a building location? Let’s take a look at some of the factors that help make a business location successful.
Who is the Customer?
The main question any business owner needs to ask is who is their customer. Too many businesses open without really knowing this answer. They are confident people want the product or service they are selling and pick a location they think will work.
The choice of where a business decides to locates ties that business to the people who live and work in the immediate area. While some locations may look “perfect”, there may not be the right people close by to support the business.
When considering a location, the demographics of the people who live and work around the location is critical. Demographics are the common characteristics that identify and distinguish people in an area. Demographics also tell us a lot about purchasing behavior and habits. Common characteristics include items like age, education level, income, marital status among others. The act of matching up the customer base of the business with the demographics around a location is the key to a successful location. While proximity is more important for some businesses than others, people will travel a distance to shop. With that said, the closer a business is to the customer, the more convenient it is for the customer to spend money at that business.
Hopefully before starting a new business, the research on the customer is already done. If it hasn’t, we need to go back to Step 1 and work on this section of the business plan. Knowing who the customer is, will help answer the important question of where to find that customer. Knowing where to find the customer leads to where the business should be located. Many entrepreneurs starting a business that has mass market appeal like restaurants, grocery stores, gas stations, etc tend to focus on finding the highest traffic location within their budget.
“While traffic is important, the right traffic is even more important. “
Even with research, this is easy to get wrong. Let’s say for example you are opening a new style of restaurant. You find a high-traffic location close to households with high incomes. Sounds like a recipe for success, right? Not necessarily if this neighborhood is primarily older individuals as they tend to try fewer new dining concepts. A better location may be closer to a neighborhood with recent college graduates and young professionals as they are more likely to try new cuisines.
Fortunately, the Census bureau has this demographic data and it is available for us at no cost. The Census Business Builder has interactive maps that provide demographic data. This data will give us some powerful general conclusions, but still visit the top locations and verify the findings.
How do I Choose the Perfect Business Location?
After we get the demographics nailed down and find a location that best serves the target customers, the immediate surroundings of the building need to be taken into account. Visibility, amount of foot and vehicle traffic, proximity to customers and easy parking are all factors for the perfect location.
How Easy is the Location to Find?
While many buildings are located along high-traffic areas, not all are equal. Those that are hidden behind other buildings, don’t have adequate signage or have a narrow storefront in a shopping center are at a disadvantage.
If the location you are interested doesn’t have enough signage, be sure to research signage regulations before you sign the lease. Some cities are very difficult to get signage on or around the building. Talk to your local city planner or economic development office to get more details before assuming you can get signage.
What are the Traffic Patterns?
Vehicle traffic needs to also be evaluated. For instance, pay attention to the volume and direction of traffic. If people have to cross busy lanes of traffic to get to your store, they may decide it isn’t worth the effort. Also, a high traffic location where their speeds are fairly high may mean missed opportunities as people miss signage and pass by the store.
For some businesses, pedestrian traffic needs to be checked out too. Some businesses focus on foot traffic from densely populated areas like office buildings, hospitals, apartment complexes, etc. In this case, be sure to check whether the location is close enough to these facilities, easy to walk to and safe to get there. Walk-in traffic can be a great way to get new customers that may not have otherwise known about your business.
Once you have a couple of locations narrowed down, sit outside a few different times of day and week to check the traffic flow and make sure the location is easy to access during peak traffic periods.
For a list of average daily traffic counts by state, click on the link for your state below:
Have you Considered Parking?
Parking is important to the success of a store. Not just the number of spots, but is the building close to the lot and is it easy to cars to get in and out of? Another consideration is whether the lot is well lit and maintained. The parking lot is one of the first things customers interact with when they come to your business. Poorly maintained lots can give a negative perception about a business before the customer walks in the door.
Are you sharing parking with other stores? If so, you will want to visit during the days and times when your business will be most active to be sure there are enough spots for your customers. If the number of spots is a concern, consider having employees park off-site to open up spots for customers.
Convenient parking should be an even higher priority if the target customers are older. Many will consider the hassle of parking before visiting a store.
What is the Condition of the Property?
The image of the property, both inside and out will give the customer a perception of the quality of the business. There is no second chance for a first impression and if the first impression isn’t what potential customers expect, they may never come in your store. Businesses targeting more affluent customers with higher-end products or services should be a high priority.
Another consideration is whether there is a lot of deferred maintenance with the property. This could potentially indicate long-term issues with a hard to deal with landlord.
Is the Space Affordable?
While it may seem obvious to want to select a location where there is a lot of visibility from traffic, you won’t be the only one. There are a limited number of premium properties and many people are shocked when they find out how much that right location will cost. Add the location cost to all of the other expenses when starting a business and many people second guess the location they had in mind.
It may be tempting to pick a location that is just a few streets off of the main roads to save money. Is this a good decision? Being a couple of streets off may not sound like much but being highly visible is much more important for some businesses than others. There isn’t a one size fits all answer for every business. You have to have a good product or service of course, but for most start-up businesses with no name recognition, what they save on rent is oftentimes replaced with the same if not more in advertising costs to get people to find them.
Have you Considered the Competition?
Depending on the type of business, competitors can have a positive or negative impact on the potential success of a business. For instance, businesses where comparison shopping is popular like resale shops or car dealerships, being close to similar businesses is an advantage. Likewise, if you are opening a steak restaurant right next door to another steak restaurant, that may not be the best decision.
Home Businesses
Home-based businesses aren’t thought of as needing to think much about location, but that may be a mistake. If you are shipping products from the home, what is the service for picking up packages? Another consideration is making sure you can get work done in the home office. It can be difficult having friends and family “drop in” and not realize you need dedicated time to work.
Buying vs Leasing a Building for a Business
After all of the research is done and the ideal location has been picked it’s time to buy or lease the location.
Buying a building is less complicated than leasing a building for a business. The buyer and seller agree on a price and sign the contract. There is no landlord and the buyer has full-control over the appearance of the real estate, but also all of the headaches in owning property. One downside of buying a building is that commercial real estate typically takes time to sell and if the business fails, that can be an additional stress.
Buying a building may provide better cash flow as opposed to leasing. With low-interest rates and generous loan terms, it may cost less than leasing.
Leasing a commercial property offers flexibility that purchasing a building doesn’t. For starters, if the business doesn’t work out or the square footage needs of the business changes, there isn’t a building to sell. Also, while cash flow is typically tight in the early years of a new business, a leased property usually has the tenant covered should there be any major repairs needed.
Some terminology common to leasing commercial real estate:
Base rent or gross lease – Most commonly known as the monthly cost to occupy the premises.
Triple-net lease – Also known as NNN, the tenant agrees to pay all property taxes, building insurance and maintenance.
Ground lease – The tenant develops a piece of property during the lease and after the lease expires, the land, building and all improvements go back to the property owner.
Capital lease – Typically for a long-term lease, the lessor agrees to transfer ownership to the building owner after the completion of the lease period.
When signing a commercial lease agreement, it’s a good idea to have an attorney review it as the landlord has a lot of experience in this area. The landlord could be taking advantage of the person leasing the property. A few hours of an attorney’s time is a small investment in the success of your business.
Most commercial leases are going to require a security deposit in addition to a first and last month lease payment.
As with most decisions when starting a business, selecting a location requires thorough research. Be sure to work with the local small business community, chamber of commerce, city economic developer to be sure you are making the right decision.
