Wednesday, March 30, 2016

7 things to look at in evaluating a business move

What do you do when you are evaluating options for growing a business?  The lease might be up for negotiation, the business might be bursting at capacity or workforce might be an issue. Maybe you got the business started by leasing a space and now it has grown to the point where you need to look at your options. Or it could be in your long range plan to buy a new building or build a new facility.

A client called last week and said the lease was up on the building she was in and she wanted to move to a new, better location.  She found a 'perfect' space, however it was a lot bigger, much newer (and nicer) and would require them to triple their business to pay the monthly payment.

The only problem was that they needed a loan; they had used up all their working capital with getting in to the original space and since it has not been in business three years, it is still considered a start-up.  They also had less than perfect credit and didn't have a plan for tripling sales. What should they do?

Another client was looking at moving a business from a rural area and locating closer to Spokane to take advantage of a larger workforce, or possibly even looking at Idaho. Is it worth it for them to move?

Where does a business owner start?

Here are seven issues business owners need to evaluate in determining whether to move the business.

1.  Project out the savings and costs of the move and new expenses.


Moving a business not only results in expenses such as tenant improvements or hiring a moving company.  Other significant costs can be IT, electrical upgrades, A/C and lost time for the move. If you plan to do it with your own crew over the weekend, will you pay overtime? Will your employees be willing to volunteer time?

You will also want to think about what expenses will be added at the new location.  Will your sales increase due to a more efficient layout? How much do your sales have to increase to pay a higher lease?

If you are comparing states, look at taxes, state income taxes, labor force, comparable wages and other compliance issues.  In some areas, there may be some state or federal incentives that you would qualify for, depending on the industry.

2. Financing a move or expansion.


One of the most important pieces of weighing a business move is the financial element. If you will be seeking a loan, your bank will likely want to see a business summary or full business plan, cash flow projections and how the loan will be used. They will also want to know how much cash you have to contribute, in addition to collateral.

Other questions to consider are:
  • Can the current business support the move? 
  • If you are expanding, what increase in business can you expect?
  • If business will increase, will it be enough to pay a higher lease rate or loan?
  • Will you hire more employees?
  • How will you manage existing debt and repay new debt?
  • Do you have the required owner contribution of anywhere from 15-40%?

3. Look at pros and cons; what else will the move allow?


There are many pros and cons to weigh, such as:
  • Will the move be better for your vendors and customers? 
  • Will a larger space allow for expansion? 
  • What about the curb appeal and neighborhood? 
  • Does the location stay true to your brand? 
  • Does the new location benefit the business and your employees?
  • What if sales don't increase like you plan? Will the business still cash flow?

Sample spreadsheet of site comparison

4. Examine current lease terms.


Business owners need to consider what the current lease terms are regarding notification, sub-leasing, moving and options.  In some cases, tenants will get into a space for a lower rate and shorter term when a business is starting with the expectation that the lease rate will increase and hopefully at that point the business is better established and able to handle an increase.

There is also likely a clause that states how much notification is required to the owner if you are going to move or opt to stay.  Owners are allowed to show and advertise a space if the space will be coming available, so be prepared that a 'For Lease' sign may go up on the property and the owner may show your space.

If you find a new location and still have time left on your lease, there may be a provision that prohibits sub-leasing, so keep this in mind as well if you want to move while there is still time left on your lease.

5. Renegotiate lease rates or tenant improvements.


The lease renewal is a good time to bring up building concerns.  Perhaps security or parking is an issue.  Or the bathrooms need to be remodeled.  My advice is similar to the advice when first negotiating - choose a few things to negotiate and compromise on, don't try to change everything in the lease and get a lower square footage rate on top of big changes.

You should have an idea of comparable lease rates for your area and industry and your broker or agent should provide these.


6. Relocating or negotiating.

As you evaluate your options, you have some choices.  You can do it yourself, use the broker for a space or you may need to work with your own commercial broker to locate a new space and negotiate lease terms.


Keep in mind that if you use the real estate agent for the location you are interested in, they represent the owner.  If you work with your own agent, you hope they are working in your best interest.

7. Quality of Life


In evaluating a move to another state or community, some employers weigh quality of life heavily, especially if they want to retain key talent or are in a competitive industry where lifestyle plays a huge part of recruiting workers.

Spokane Crime Map
Will the location be safe for all your clients and employees? Are there associated costs that will pass down to employees, such as hefty parking permits?

Other quality of life components that some companies evaluate include crime rates, traffic, amenities, schools, labor force and recreational activities.

Finally, owners may want to think about a location where they want to go every day.  Do you want a ten minute commute or an hour in traffic? What does your family say?


Summary

This is by no means a comprehensive list. There are many things to consider when it is time to look at moving, expanding or renewing a lease.  One thing that might be helpful is to develop a spreadsheet to measure and rank potential sites to help narrow locations.

And the clients above are both still evaluating their options. The important thing is that they didn't run out and sign a new lease without considering all the ways it could impact their business and their lives.

If you need help with any of these areas, contact your SBDC advisor.  We can help develop a comparison matrix, prepare cash flow projections, critique a business plan, review the lease or find comparable rates.