Getting the Right Building
There are just too many businesses that work and operate from unsuitable premises, and the reason is price. When they were looking for suitable premises they put too much emphasis on price, and not enough consideration was given to needs and consequences. It makes no difference whether you are commencing a new business or buying an existing business; it is economic sense to have the right building and location.
Many businesses that rely on vehicular and passing foot traffic, are locked into constantly spending huge amounts of advertising dollars, just to tell people where they are. On top of that many offer gimmick giveaways for when customers do arrive. If their position offered good exposure, then they would spend far less on advertising and customer gifts. If good exposure costs a little more in rent, then it’s worth it, because it costs no more in the long run.
Consumers shop by habit; they don’t like complications. They like it nice and easy. Trying to encourage them to walk a fair distance, or drive down a narrow alley way, or drive past your competition, to your remote cheaper location, becomes very expensive and adds substantially to your cost of doing business. Those elements reduce your margin, and in many cases the entire operation fails purely because they were just too difficult to get to in comparison to competition.
Just as your product and prices are competitive, so are your parking facilities. If your competition offers easy access and egress, with car parking that is protected from the elements, then you have to consider offering the same. If you don’t, then you are giving your competitor’s customers one good reason to shop there and not with you. You will be able to break that cycle by offering a reduced price, but again that’s out of your profits, so traffic lights, streets, buildings and parking facilities have a direct bearing on the businesses’ profitability.
Having the right building is more than customer convenience.
Remember, business is about the future, not what it did yesterday. Good business is about being aware of future planning and having a strategy to accommodate change. Internally; it’s your operational procedures that will determine how you address some of those essential facilities and elements listed below:
1. Council zoning
2. Future town planning, and main roads intentions (5-10 yrs)
3. EPA, and trade waste disposal, methods and requirements
4. Importance of vehicular traffic
5. Importance of foot traffic
6. Importance and design of signage
7. Reception area
8. Retail area
9. Assembly or production area
10. Assembly or production area height requirements
11. Work area and availability of natural lighting
12. Work area ventilation / climate control
13. Loading docks and ramps
14. Storage requirements
15. Communication facilities
16. Lunch room or canteen
17. Sick room and first aid
18. Shower and toilet requirements
19. Employee parking and security
20. Can the level of rent be comfortably absorbed into our fixed costs.
There are other factors that can make or break the ideal building and location, and that is your building’s environment. More factors for your consideration while you are deciding on your future business premises are:
A. Is there a bus stop out the front or nearby that may enhance exposure. People spend while waiting for taxis or buses. They also leave rubbish laying around, and you will be the one that has to clean it up.
B. Is there a Pub next door, where drunken patrons threaten night time security. I have seen it many times before. Drunken patrons urinating and vomiting in shop front door ways, alleys and side loading bays. It adds to your insurance premiums, and yes, those are the facts.
C. Are the neighbouring businesses compatible. Well, pet food next to a restaurant may or may not work. Compatibility is important.
D. Are there conflicting trading hours or shift workers. You can look like you are never open to the after work shopper, if you close at 5 when every other business around you trades until 7.00 or 9.00 pm. Perception is important.
E. Are the neighbouring businesses seen as controversial. A brothel or sex shop, or an abortion clinic next door, could leave you extremely busy, or vulnerable to risk filled protestors. What’s the market you are targeting?
F. Is there a school nearby that threatens security, or perhaps has an overpowering influence on trading hours. This also has a severe effect on vehicular congestion at certain hours during school days. I have seen businesses that have to close their doors during school holidays because there are no customers. Why? Regular customers don’t patronise the shop because the populace of schoolies intimidates, and cause long delays during the week. Therefore to the passing shopper, it is easier to stop else-where, where there are no crowds of schoolies, speed or parking restrictions. Be careful there.
a) If your intention is of retail or convenience category, then consider that students of today do enjoy a certain level of disposable income, but the trend is towards health food, rather than pre-cooked takeaways. The school, parents, government and television all play a role in spending habits and activities of our youth.
b) All of these issues may impact on trading patterns. Some enhance and others have a deteriorating effect.
There is another issue. When a person is about to commence business they become nervous and excited at the same time. I have seen excitement overrule logic. We believe, we visualize and we dream, but there’s a lot of difference between hope and expectation. We all hope that our new venture will work, of course we do. But there may be some underlying reason the venture doesn’t work, therefore it is in your interest not to sign a long lease until you are confident your business has developed sustainability.
Your lessee or landlord if you like, has gained experience in business merely by the fact they own or are paying off their commercial building. They understand the pressures of long term commitment in business. They, like yourself are looking to establish a long term relationship. It is likely your monthly rental fee will be contributing towards their mortgage, be it that building or any other. They want reliability from their tenant. They want a good cooperative working relationship. They have good cause for concern if you appear to be not making money. Their investment is dependant upon the success of their tenants.
During your inspection of the premises, don’t hesitate to ask for a helping hand. A fair and common help is a rent free “set up” period until you can commence trading, usually between 2 to 6 weeks.
This is time for painting, signage, floor coverings or drapes, perhaps the installation of specific machinery. Plus the preparation of your launch or relocation advertising campaign. Your lessor may also be offering to provide a fixtures and fittings “fit out” where the landlord completes the work to your specifications. The cost is borrowed through the landlord, and repaid in addition to the monthly rent.
Secondly, and most importantly, it is essential that you say to your landlord, you would like the first six months of your tenancy to be on a monthly basis.
If your business is trading profitably at the expiry of six months, advise them that you would then, be pleased to enter into a long term lease agreement of the premises. Perhaps three years with a first option for another three after that as well.
If your business fails within the first six months you would like to be able to walk away without the commitment of having to pay a lease out, that could more than likely be thousands of dollars.
Your landlord will appreciate your honesty and the mature way in which you are handling your own situation. You can be as excited as you like, but don’t forget to be sensible. You will be rewarded for it.
Some landlords ask for 5 year terms, but the level of stamp duty could become a financial factor. Three years are the most suitable and common terms. If you take only one year as your first year, then be aware that your landlord has every right to formally request that you vacate on completion of the one year term.
It seems the most common commercial leases are identified as 3x3x3, thus being only a 3 year lease, with 2 options you can take up or decline. Twelve weeks or 3 months is the accepted notice period on most commercial leases.
Traditionally, in Australia, the cost of legally preparing a commercial lease is payable by the lessee and not the lessor. It is in your interest to ask an approximate cost before you proceed. The lease will be prepared by the lessor’s solicitor and conveyed onto your solicitor for perusal before signing.
Also consider this. Energy is an expensive resource. It’s expensive to our environment and our wallets. Make sure your building has good natural lighting. Perhaps sky-lights and sun reflectors. Large windows are good but depending on the aspect, may heat your building beyond the comfort zone. Natural ventilation is preferred because the alternatives will eat away at your profit margins. Poor ventilation can result in making you and your employees feel uncomfortable at work and that can impact on productivity.
Your employees look after you, so in return look after their parking and security as best as you can. You don’t want your customers having to park away down the street because your car park is full with your employees cars. Do your best at maintaining an equilibrium between employees cars and customers cars. Make yourself hard to get to, and any customers you hoped to get may just go elsewhere.
On the other hand, if your business is a tourist attraction you will want a variety of vehicles in your car park that could be perceived as popular patronage. An empty car park could send the wrong message. You have to remain “user friendly”.
Your building is an influential contributor that determines your image.
Successfully operate from your building for any longer than 18 months to 2 years and beyond, and your lease will have generated value in the event of a sale. Your lease is a purchasers guarantee that the location everybody knows, and has proven successful in the past, is guaranteed available in the future. It is contributing towards generating repeat business, and that’s goodwill.
These rules apply moreso to retail of goods. If you are a professional with a specific market, say accounting or legal, medical or dentistry then foot and vehicular traffic will not represent the level of importance as an ice creamery or food shop.
In Australia, Kmart introduced themselves to the public in a free stand alone glass fronted building in what was a fringe suburb of Melbourne. Car parking stretched across their entry doors to accommodate probably 300 cars, maybe more. Since then we have seen them go from stand alone, to share with sister company Coles, then to shopping centre locations. The reasons for changing trends were more of an accounting decision rather than an image decision. By selling off the buildings they were able to release millions of dollars that returned better on retail than rental income. They had committed too much money in property, rather than trading dollars.
You can end up the same. It’s important to do the sums when considering business premises. Europe and the US consider leasing is more financially prudent, rather than ownership. In Australia some financiers will have you believe the opposite. The great Australian dream is often the great Australian nightmare.
When people commence a new business they can only anticipate trading patterns. Many commit financially to their estimates and when income fluctuates they become severely restricted in buying raw materials or stock. Meeting a mortgage payment, or more importantly trying to catch up becomes increasingly difficult.
Principle and interest payments have to be easily absorbed by product sales, but as an owner, in comparison to leasing, you will have to find additional money for
1. Insurance
2. Maintenance
3. Rates
Of which you will be able to claim a % (percentage) of taxation.
If you are renting you will be able to claim 100% of what your property costs are.
In summary, don’t rush in to any building just because it represents commerce or industry. Yes, it’s exciting to get an affordable building, but it’s a lot more exciting when you know you have got the right building.
Getting the Right Building - To learn more about this author, visit Garry Donnell's Website.
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