July 2011
W-2 & 1099 Information

Small Business Blog

Brought to you by Steve Strauss

July 2011

Location, Location, Location

Recently, I had to move locations for my business and although it was not a fun experience, it was a profitable one. The lease in our old offices was running out and the landlord wanted to raise my rent. I explained that in this economy that was not a good idea. He didn't care.

But someone else did - a new landlord. I began to look around and found better digs at a better price, and with a landlord who was happy to have my business. He offered me a much better deal. My offices are now in a great part of town and everyone is happier.

Except, of course, my stubborn old landlord.

In this blog and the next few, I want to talk about how to secure a great location for your business, and by great, I mean anything - a great space, a great price, great signage - whatever great may mean to you.

And it is true that "great" can mean many different things. For instance, not all businesses need a great location; having affordable rent is greater. Conversely, retail businesses need to be in an area where there is a lot of walk-by or drive-by traffic - that's what makes them great - and as such, rental prices may be further down on the list. The Old Spaghetti Factory always seems to have its locations near a railroad, and you can bet one reason is because they pay much less for those properties. So there are many things to consider.

What to look for in a business location: When selecting a location, first and foremost, you must determine how important foot and car traffic will be to your business. A high profile location is important when impulse buying is part of your plan. Thus, a gas station needs a great location with a lot of traffic; a dentist does not.

Indeed, an out-of-the-way location can be a great choice for many businesses. Opening in a redeveloping urban area, for example, may allow you to benefit from tax breaks, or a grateful consumer base. Generally, if you are selling commonplace items (food, groceries, clothes, etc.) location is probably more important to you. If you are selling services, or specialized products, location should probably be less of a concern.

There are many different sorts of locations that may have all of these questions already answered, such as shopping centers. While a shopping center or mall's can be a great spot for many businesses, you must weigh the benefits against the high cost of doing business in that location. Make sure you will be able to make a profit.

And what about your employees? What do they need from where they work? My friends here at Greatland for instance are in the business of making life easier for small business, and as a small business owner, that's what you need to think about too. Being a great employer allows you to attract the best possible employees, and that in turn can set your business apart.

So when it comes to locations insofar as your staff goes, there is actually a lot to consider. Among other things, you will want to make sure that there is adequate cell phone coverage in the area and that they have access to other necessary services. Other things to consider are:

  • Does the building have adequate restroom facilities and break rooms?
  • Can employees and suppliers get there easily?
  • Is there a shipping and receiving area?
  • Is there enough work space, phone jacks and electrical outlets for everyone?
  • Where will the crew go for lunch?
  • Does the facility comply with the Americans with Disabilities Act?
  • Is there room to expand if your business grows?

And what if yours is going to be a professional office? One smart option is an executive suite. Executive suites are small office spaces in office buildings that individuals or small companies can rent. Typically, each tenant has an individual office and shares the services of the executive suite's receptionist and use of the suite's joint conference room, copier, postage machine and other office equipment. All in all, it's a pretty good deal.

Bottom line: Too often small business people make their location decision based mostly on the cost of rent, and that's the mistake. The needs of your staff and customers must weigh in equally as much.

Next week we will look at the specific things to consider when choosing a location.

Specific Location Considerations

Down the street from me there is a building that has been, in the past two years

  • A sushi bar
  • A French bistro
  • A coffee joint, and
  • A taqueria

I would bet that the different entrepreneurs who opened these ventures thought they were getting a steal on the rent in this location, but the fact is, some locations are, shall we say, jinxed? You know the ones - no matter what business moves into that location, it seems to last for a few months before closing up shop. You must avoid these locations, as, no matter what you do, the local clientele will already have preconceived notions about your business. It doesn't matter how low the rent is, it's still a bum deal.

Last week in this space, I discussed some general consideration that a business must take into account when choosing a location, above and beyond the rent. This week I want to drill down a little more and look at the specific things you want to consider when looking at various locations for your business:

  • Population and Demographics: Will there be enough people to support the business? What has been the reaction and fate of similar businesses in the area?
  • Traffic. You want the site to be near some centers of activity. My father owned a chain of carpet stores when I was growing up, and he loved to be across the street from malls. He figured that he got the benefit of the mall's advertising and traffic, but without the high rent of actually being in the mall. Is there public transportation nearby?
  • Competition. Where is your competition located? Fast-food restaurants often like being bunched together, but print shops usually like to be the only one in the neighborhood. Are there too many competitors nearby?
  • Visibility. Make sure your potential location is visible from major roads.
  • Signs. You need to be sure that there are no restrictions in the lease or the law that will limit your ability to post adequate signs for your new business.
  • Zoning. The spot, obliviously, needs to be zoned for your type of business (see below.)
  • Appearance. Is there adequate parking? Is there a bathroom for the public? Make sure the place is landscaped well, has adequate outdoor lighting, and has appropriate businesses nearby.
  • Interior Design. A well-designed display of merchandise can make shopping easier for the customer and boost sales. So be sure to review the flow of customer traffic. A free-flowing pattern has better visual appeal and allows customers to move around, while aisles offer better merchandise presentation.
  • Rent: Of course rent is important, but the takeaway is that you want to avoid picking a location simply because the rent is cheap; that should not be your main consideration. While keeping your overhead low is indeed a key to success in business a cheap, bad location is similarly a key to failure.

Legal Considerations When Choosing Your Location

Back when I practiced law full time (before I came to my senses!) I had a client come into my office with one complaint: He wanted to get out of his lease. It turns out that the poor guy signed a five year lease for a burger joint and the only way he could make ends meet was to close on weekends and work the festival circuit. So he was essentially working seven days a week in order to break even.

Unfortunately, I couldn't really help him much. Most leases are drawn up by the landlord's lawyer for the landlord's benefit and that was the case here. It was airtight. My client was stuck for another year and a half and there was nothing he could do about it.

So what I want to do in this blog and the next is help you avoid that unenviable fate. This week we will look at important legal considerations in a lease and next week we will examine how to get the best deal possible.

Here's what to be aware of:

Length: You want the term long enough to establish your business, but not so long that you are locked in if your venture doesn't work out. A year or two, with an option or two for a renewal is usually a good idea.

What's included? Consider

  • Square footage. Most commercial office or retail space is quoted by square foot per year. So a 1,000 square foot retail space with an asking price of $15 per square foot would cost $15,000 per year, or $1,250 per month.
  • Net or gross? A “triple net lease” is one where the renter pays, in addition to rent, all operating expenses too. So, with a triple-net lease, you must be very clear about what is, and is not, included.
  • Utilities: Under some leases, the tenant is required to purchase the utilities from the landlord. If so, be sure that the lease grants you the right to audit your utility bill.

Zoning: Cities usually zone buildings and areas into residential, commercial, industrial, and mixed-use areas. You must be sure that the location you want is zoned appropriately for the business you want to start. Check with your city before signing any contract. Luckily, even if it's not zoned as you want, it is possible to get a “variance” from the city. A variance is as the name suggests, a change in the normal rules. Your lawyer can help with this.

City or county restrictions: Find out if there are other legal restrictions that may affect your business. For example, some municipalities limit the number of certain types of business, such as cafes or fast food franchises, to certain areas. Other restrictions may include that your business provide off-street parking, or close at a certain time, or limit the size and type of signs you may have, etc. Your city should have a business development office that can answer these sorts of questions.

Contract restrictions: In malls and other retail complexes, the lease or CC&Rs may limit what you can do. For example, in a certain shopping centers, there may be a limit of no more than one news kiosk, or two burger joints.

Yes, considering and researching the legal intricacies of your location and lease can be a lot of work, but it beats walking into a lawyer's office in two years, looking for help on how to get out of that bum lease you signed.

Getting the Best Deal You Can On a Lease

Last week I shared the story of an old law client of mine who got in way over his head with a bad lease. It nearly led him to bankruptcy. A main reason that he was in trouble was that he signed the "standard lease" that was presented to him by the landlord. He was told that this was the same lease that all of the landlord's tenants signed and that was that. So he signed.

Huge mistake.

Leases are also called "agreements" for a reason. Both sides must agree to all lease terms. Sure it may look standardized, intimidating even, but the fact is, if you are negotiating lease terms with a landlord, you are a hot property. Finding qualified commercial tenants these days is no easy task, and with vacancy rates in many areas still very high, potential tenants are gold.

The upshot is that the lease is probably far more negotiable than you think it is. Yes, some things won't be negotiable, but many are, including:

  • The amount of rent
  • Getting a few months free when you move in
  • Improvements before and during the term
  • The length of the lease
  • Limiting rent increases
  • Common area upkeep

As you can see, I am suggesting that most parts of the lease are quite negotiable and can be negotiated in your favor. So how do you do that?

Get a lawyer.

Look, I usually like to tell people that they often do not need a lawyer because, well, they don't. With simple documents and matters, hiring a lawyer is definitely not always necessary.

But in this case, I think it is. Hiring a lawyer when renting new space serves two vital purposes:

  1. It forces the landlord to take you more seriously. The landlord will be far less likely to try and get one past you if he or she knows you are represented by counsel.
  2. You will get a better deal. Lawyers negotiate for a living and it is probably safe to say that you do not. So bringing in a pro helps. Additionally, there are clauses and "magic words" in a typical lease that may get past you – it is not that you are dumb, it is just that there are terms that seem begnin and are really not. Your lawyer will know what these are and know what to do with them.

Yes, hiring an attorney will cost you some dough, but it should be well worth it. You will probably save that amount in first few months of your sweet new deal.

Negotiating a lease with a landlord is not all that different than negotiating the purchase of a car. The important thing is to know what you want going into the deal and to remember the rule: Everything is negotiable. The lease you are given is simply a starting point.

Indeed, if you are at the stage where you are negotiating over lease terms, then you have become a valuable commodity to the landlord. Finding qualified businesses that are willing and able to take on a commercial lease payment is not so simple. Accordingly, you may be in the power position when negotiating a lease and can ask the landlord for concessions and changes to the lease, as necessary.

You do so by doing your homework first. Find out how much similar spaces are renting for. Is the vacancy rate high or low in this area? (If it's high, you can negotiate a great deal because the landlord needs you.) If the space is vacant, find out how long it has been vacant (the longer the better for you). The more you know, the better equipped you will be to negotiate a good deal.

Once you are presented with the lease, read it carefully, and then give it to your lawyer for review. If you find some part of the lease that you or your lawyers don't like, negotiate that point. Remember that the lease was drawn up by your potential landlord's lawyer and will certainly favor your landlord. Remember too that although you might be presented with a pre-printed lease, and that it may seem difficult to change, it is nothing more than a contract, and the essence of contract law is that both sides must agree to all conditions. That, in fact, is why a contract is also called an agreement. If you don't agree, it can be changed.

Above all, try and cultivate a good working relationship with your landlord. That will go farther towards working out problems than a dozen letters from your lawyer.