LocationDefinition: The physical space where your business exists
What realtors say about residential real estate also applies to many small businesses--that the three most important considerations are location, location, location. Location is especially important for businesses in the retail and hospitality trades because they rely a great deal on visibility and exposure to their target markets. But location is also important for service and manufacturing ventures, which have such costs as advertising, promotion, and distribution that are a direct result of where they're located.
Service businesses may not have the foot traffic and high visibility requirements of retailers, but their location has to be convenient for customers and their employees need adequate parking. Manufacturers are concerned with keeping operating cost down, and that means locating near key suppliers in areas accessible for pick-ups and deliveries.
When choosing the best location for your business, your first step is to target the right community. You can analyze the community you're thinking about by considering the following questions:
- Is the population base large enough to support your business?
- Does the community have a stable economic base that will promote a healthy environment in which your business can grow?
- Does the demographic profile closely match that of the market you wish to serve?
- What are the community attitudes or outlook?
Next, you'll need to analyze the population. Each year, the U.S. Census Bureau publishes the Economic Censuses, which are comprehensive studies on the number of firms in various areas and the populations of the communities where they're located, called Standard Metropolitan Statistical Areas (SMSAs). Once you find the SMSA in which your business is located, you can extrapolate the information you need, such as what the population is for your community. For more information, visit the Census Bureau's website.
A community's economic base can have a direct impact on your opportunities. People move from one community to another for better job prospects, more money, better schools, and a host of other reasons. To evaluate a community's economic base, check census data and other business statistics for the following information:
- The percentage of people employed full-time and the trend in employment
- The average family income
- Per capita total annual sales for goods or services similar to yours.
You can also learn a great deal about your prospective community by looking and listening. Some red flags to pay attention to include:
- The necessity for high school and college graduates to leave town to find suitable employment;
- The inability of other residents to find local jobs;
- Declining retail sales and industrial production; and
- Apathetic local business owners, educational administrators, and other residents.
Favorable signs are:
- The opening of chain- or department-store affiliates;
- Branches of large industrial firms locating in the community;
- A progressive chamber of commerce and other civic organizations;
- Good schools and public services;
- Well-maintained business and residential premises;
- Good transportation facilities with access to other parts of the country; and
- Construction activity accompanied by a minimal number of vacant buildings and unoccupied houses for sale.
It's also important for you to understand the demographic profile of your potential customers in order to properly evaluate a community for location. To see if the community you're considering offers a population with the demographic traits necessary to support your business, look at the community's:
- Purchasing power. Find out the degree of disposable income within the community.
- Residences. Are homes rented or owned?
- Means of transportation. Do prospective customers in the area own vehicles, ride buses or bicycles, and so on?
- Age ranges. Does the community consist primarily of young people still approaching their prime earning years, young professionals, empty nesters, or retirees?
- Family status. Are there lots of families in the area or mostly singles?
- Leisure activities. What type of hobbies and recreational activities do people in the community participate in?
Detailed demographic information is available from the Census Bureau's website. Click on "State and County Quick Facts" for your state to find county-by-county demographic information. You can also get this kind of information from established businesses within your industry or from a trade association. Gale's Dictionary of Associations, available in most public libraries, contains listings for more than 30,000 trade associations' national headquarters. Many associations also have local or regional chapters that serve members in a variety of ways, with everything from newsletters to lobbying actions.
In addition, the Bureau of Labor Statistics publishes the Consumer Expenditure Survey (CES), which you can find at the Bureau's websiteby clicking on "consumer spending." The CES annually samples 5,000 households through its Quarterly Interview Survey and its Diary Survey to learn how families and individuals spend their money. Unlike other surveys that might ask only how much people are spending on household or home appliances, the CES collects data about nearly every category of expenses--from alcoholic beverages and restaurant meals to pensions and life insurance. Bureau of Labor Statistics analysts then sort the information and group consumers by income, household size, race, gender, and other characteristics relevant to your business.
When you're satisfied that the community you plan to serve has the qualities to support your business and is convenient to your customers, then begin looking for a site.
Choosing a Site
According to SBA studies, poor location is among the chief causes of all business failures. In determining a site for a retail operation, you must be willing to pay for a good location. The cost of the location often reflects the volume and/or quality of the business you will generate. Never select a site merely because the facility is open and available or because the rent is low. Keep in mind that there is a direct correlation between low rent and high advertising expenses. Base your selection of a site on the market information you've obtained and the potential of the area to generate income for your company.
The most important consideration for choosing a site for a service business is convenience for customers. Service businesses that deal directly with customers, like nail salons, travel agencies and dry cleaners, don't need to locate in high-rent districts; they just need to be conveniently located on the beaten path and visible to their customers. Service businesses that are rarely visited by customers, like TV repair shops and pest control operators, can be farther afield. But these types of businesses have to make an ongoing effort to let customers know they're there--hence, the value of display advertising in the newspaper or Yellow Pages, for example.
Manufacturers will usually be restricted to industrial areas by the zoning ordinances of most towns and cities. The main criteria for manufacturers is the suitability of shipping and loading facilities, the distance to key suppliers of raw materials and markets, the availability of cheap fuel, and the skill of the support staff in the local area.
Like manufacturers, wholesalers are restricted by zoning laws within most cities. Their main criterion is proximity to local markets, since they don't want delivery to take too much time, especially if the product is perishable, or costs too much. If costs in either time or money are eventually passed on to customers in the form of higher prices, customers could wind up looking for other suppliers.
You'll want to consider the following factors when searching for a location for your business:
Restrictive ordinances. You may encounter unusually restrictive ordinances that detract from an otherwise ideal site, such as limitations on the hours of the day when trucks are permitted to load or unload. Cities and towns are composed of areas--from a few blocks to many acres in size--zoned for only commercial, industrial, or residential development. Within each zone are often further restrictions. A commercial zone may permit one type of business but not another, so make sure to check the zoning regulations of any potential location before pursuing a specific site or spending a lot of time and money on a market survey.
History of the site. Learn about the recent history of each site you're considering before you make a final selection. There are sites--in malls and big shopping centers, as well as in independent locations--that have been occupied by a succession of businesses that failed. Businesses most often fail because of poor management, but sometimes choosing the wrong location is a factor. Find out how the site you're considering affected the businesses of previous tenants or owners.
How much rent your business can afford to pay. Your first-year profit-and-loss projections will tell you the amount of sales your business will most likely generate. To judge your rental expenses (leased space plus any add-on costs) relative to your sales, divide the total amount you expect to pay annually by net sales (gross sales minus returns and discounts). Multiply that number by 100 and compare the percentage with those of similar businesses to see how you'll fare.
Terms of the lease. Occasionally, an otherwise ideal site may have unacceptable leasing terms. The time to negotiate leasing terms is before you sign the lease.
The rent-advertising relationship. Your advertising budget is closely related to your choice of site and the proposed rent. Malls often allocate a lot of money to advertising, in addition to that spent by so-called "Big Box" and department stores. If you locate in a mall with big department "anchor" stores or have Staples as your neighbor, your cash register will likely be ringing up sales the first day you open your doors, with no advertising effort on your part. Of course, your rental expenses will be proportionately higher than those for an independent location.
Proximity to other businesses. Your business neighbors can influence your volume of business. Their presence can work for you as well as against you. Make sure your neighbors attract customers with a similar demographic profile as yours. For example, a shop selling upscale house wares isn't going to benefit by being in the same mall as the tattoo parlor and biker bar.
Anticipated sales volume. For some types of retailers, exclusivity is key when it comes to small shopping districts or malls--only one company offering a particular type of goods or services can successfully locate in each area without sparking an ongoing "whose price is lowest" battle. Usually, there's not that much business to spread around. But if the foot traffic is high, if there's a strong market demand, and/or if the business sells a broad range of goods or services, there might be enough business to go around for everybody.
Accessibility to prospective customers. When determining accessibility, sit in your car and judge traffic patterns (both on foot and in cars) at different times of the day. Try to determine what hours your business needs to keep in order to be most convenient for customers. Revisit the site on different days to observe any changes in the pattern. Do some informal market research by interviewing people passing by the site you are considering. Do they feel a need for your type of business at this location? Would they patronize it? What kinds of goods or services would they be interested in buying? Where do they now shop for these goods and services?
Customer parking facilities. Does the site provide easy, adequate parking and access for customers? Is it well lit? Is there sufficient security? What is the condition of the parking area? Will it need expansion, resurfacing, or striping, possibly at additional cost to tenants? Keep in mind that even large shopping centers and business parks sometimes do not have adequate parking for all their customers. If you plan to locate in a mall or business park, evaluate the parking conditions over a period of days at different times and judge whether or not they are acceptable.
Side of the street. Market research has demonstrated that the "going-home" side of the street is usually preferable to the "going-to-work" side. People are more likely to stop at stores on the way home than when they are in a hurry to get to work on time. Also, the sunny side of the street is generally less desirable for retail operations than the shady side, especially in warm climates. Research shows that rents are higher on the shady side in high-priced shopping areas.
See also "Leases, Rental."