Full access to Entrepreneur for $5

Homeward Bound?

Opinions expressed by Entrepreneur contributors are their own.

Set your site in the right location-- homebased or otherwise.

By Lynn H. Colwell

Without a lot of money to pour into their businesses at the beginning, many start-ups opt to start from home. But is this always the best strategy? While a prestigious or prime retail location equals success for certain kinds of businesses, others can flourish from a bedroom corner. But what if either location will work for your start-up? How do you decide? The examples of these two Spokane, Washington, consultants can highlight this dilemma.

Michael Arterburn, president of Professional Solutions Inc., a resource development company, chose an off-site address. Although he had worked from home in the past, Arterburn believes having a home address sent the wrong message to prospective clients.

"When I first started, I had a post office box, but that wasn't good enough," says Arterburn. "Nobody has ever come to my office, but they seem to want me to have one. Let's say I meet someone at a restaurant and we start doing the business dance where you talk about who you are. I say I own my own business. They say, `Oh, really? Where's your office?' Every time I said, `I work out of my home,' I could feel a door closing."

On the other hand, working from home has not been a barrier for J. Kent Adams, president and CEO of Adams & Associates Consulting Inc. This consultant to nonprofit organizations oversees two part-time employees and a bevy of other contract workers from his home base, although most of his dealings with clients take place on their turf.

"In a given week, I'm probably not in my home office more than two or three hours," Adams explains, "so why incur office costs that I would have to either take out of my profits or pass on to someone else by raising my prices?"

Judging from these two consultants, you'd be wise to have a good idea of how potential clients will view your location before making a decision. Here are some other issues to consider:

1. Finances. Renting almost any space is expensive--generally more so than you may anticipate. Listen to Bob Bowman, a Coeur d'Alene, Idaho, computer consultant who moved his business, DPI Power Computing, out of his home and into a strip mall: "The expenses connected with opening a store boggled my mind. For probably ten months after I moved in, I was still writing checks for out-of-pocket expenses. I had budgeted for a lot, but a lot more was a surprise."

Of course, the idea of choosing a retail location or office is to increase business. But Bowman offers a cautionary example: "Volumewise, my business has increased 33 percent this year, but I'm not making any more money than I was before I moved." The reason? Increased expenses, namely overhead.

"When you run a retail location, people expect to see someone there all the time," he says. "I started at home by myself, then added one part-time employee. Now I employ three full-time employees and one part-time employee to cover the hours we're open."

Renting office space may not always require more employees, but there can be other hidden expenses. Renters may be assessed for their share of signage costs, additional insurance, and group marketing efforts.

2. Customers and clients. According to Daryl Erdman, director of the Pappajohn Entrepreneurial Center at the University of Iowa, "Perception is important in running a business. If you're going to have clients who come to you, give serious thought to locating away from home."

He believes the best homebased operations are those in which business is conducted over the phone and where clients or customers will rarely, if ever, visit the facility. Although today millions of professionals are homebased, there remains a suspicion that people who work from home may be less than serious.

Assess your clientele. If your target market is small companies, a visit to your home by the company president may not pose a problem. But if you're courting Fortune 500 businesses, a living-room location could spell disaster.

For guidance, evaluate your industry and your geographic area. If others in your field operate successfully from home, you're probably safe following their lead. But if no one does, you might want to find out why.

3. Home environment. While some new communities are being built that cater to homebased businesses--with houses boasting designated offices, high-speed fax/modem lines, wiring for networking in-home computers, and other business-oriented amenities--most people launching a business from home simply lay claim to an unoccupied space. This may work well at the beginning, but if you're successful, you may find it extremely inconvenient.

Explosive growth at Magellan Medical Services, a Minneapolis company providing marketing and sales support to medical companies, is the reason owner Susan Johnson is abandoning her custom-built home office.

"I need more room," she says. "The problem is that my office is continually oozing out into the rest of the house. It's just all over the place. My financial department is currently in the dining room." She also needs office space for her management team.

Keeping paperwork, books and other tools in one room isn't the only problem people face at home. Other considerations include:

If you have children, can you keep them, their toys and their noise away from your office, especially when you're on a business call?

If the family dog barks insanely every time the doorbell rings, or your Persian cat finds visitors' laps irresistible, you've got a problem. Even songbirds can be disruptive. And if your client leaves with pet hairs coating her ensemble, perhaps an outside location would be best.

If clients or customers meet you at home, do you have a separate, private entrance? Adequate parking? Can a client reach a bathroom without having to traipse through the rest of the house?

Can you provide a quiet atmosphere in which to conduct client meetings? Will you be fighting constant interruptions to attend to family needs?

4. Zoning. Zoning regulations can quash your home-business plans before you begin. Be sure to check with local zoning authorities before starting up. Some ordinances forbid any kind of homebased business, but most municipalities only restrict some aspect of doing business or particular types of businesses. (Animal hospitals, restaurants, dancing schools, music schools and manufacturers are often prohibited.) Restrictions may address the amount of floor space dedicated to the business, the number of employees allowed, parking, use or size of outside signs, inside and outside storage of materials, noise, fumes or dust.

Renting a space doesn't spare the business owner from run-ins with planning and zoning laws. Be aware that even in a commercial neighborhood, business activities may be strictly controlled.

5. Taxes. "Things are a little cleaner, taxwise, if you operate from a separate facility, because it's easier to identify expenses associated with an outside business," says Erdman. Homebased business owners, on the other hand, must learn what can and cannot be claimed, and must keep accurate records that separate household and business usage of space, utilities, etc.

Regulations regarding what types of businesses qualify for home-office deductions are still being debated. If you run an office in your home, but are out on calls 90 percent of the time, as a real estate agent, for instance, you may find that you are not, according to the IRS, running a homebased business. Tax rules and regulations affecting homebased businesses have been in flux over the last several years. For the health of your business, you must get good advice from the IRS and/or a tax expert with experience in the homebased field.

6. Personal issues. Once you've addressed the concerns above, the final areas you'll want to consider center around your work style, habits and abilities.

Are you a workaholic? If so, working from home can increase this life-threatening behavior. Before he moved to a retail space, Bowman found himself working through the night. "At home, you can work as long as you can stay awake," he says. "With the store, I put in long hours, but when I get to the point where I know I have to eat and sleep, I go home. It forces me to stop working."

People who are self-motivated, self-reliant, self-disciplined, flexible and independent do well working from home. Those who need a lot of stimulation, enjoy a busy or even frantic environment, like being part of a team, and work best with set schedules will probably do better operating from an off-site location.

Food For Thought

For help in choosing a retail location, the Small Business Administration provides two useful booklets: Locating or Relocating Your Business and Choosing a Retail Location. For ordering information, call the Small Business Answer Desk at (800) U-ASK-SBA.