ComplianceLegalFinanceMay 07, 2020

What to consider when making business facility decisions

One of the major decisions that a small business owner must make is choosing a facility from which they can run their business. If you're not running your business from home (or must move your operations out of your home) you likely have some big decisions to make.

If you are just starting out in business, and you're selecting your first business facility, spend some time considering what you need from your facility. This process will require a lot of cold, hard planning, as well as some measure of dreaming. (If you didn't have at least a little bit of the dreamer in you, you probably wouldn't be an entrepreneur!)

If you have been in business for some time (possibly working out of your home) and are now considering moving to a new facility, you may have a good idea about what you need. In this case, you may be ready to decide how to choose the right facility.

Finally, maybe you have a clear picture of your facility needs and have identified one or more potential sites for your business. The next question is often the toughest one: should you rent or buy? Because important, and complex, tax and cash management issues are tied up in this rent or buy question, many small business owners rely heavily on the advice of their accountant or attorney when making this decision. You may also wish to do so. But even if you do, you should be aware that the decision on the rent or buy question will, down the road, influence other business decisions that go beyond tax and cash management issues.

The first step: What do you need in a facility?

As a small business owner, one of your vital concerns is to accurately determine your facility needs so that the facility where you conduct business contributes to your profitability.

When you visualize the ideal facility for your business, your thoughts may run along several lines. You may first think of:

  • the interior layout: the amount of space, how it would be subdivided into rooms or work areas to best serve you
  • how it could be constructed or decorated to provide the capabilities and business atmosphere that best suits your operation
  • its exterior: its appearance (and that of surrounding buildings) and the impression that it conveys about your business
  • its location (on well-traveled streets, or tucked away in the country)
  • its provision for necessary features such as parking facilities and loading docks

The community you choose

Possibly you also think about the community in which you will locate your business and consider the following questions:

  • Will it be in the heart of a large city, in a suburb, in a small town, or out in a wilderness area?
  • Will its location provide necessities such as a trained workforce or convenient access to a major airport or other transportation facilities?
  • Can you locate it "anywhere," or will you count on your presence in a particular location to make a statement about your business?

Or maybe a bad experience with a previous or current facility makes you think along the lines of what to avoid:

  • poor business location
  • inadequate building space
  • substandard transportation access for customers, suppliers, or employees

Your business facility and profitability

However you choose to envision your ideal business facility, as a small business owner, one of your vital concerns is to see that the facility where you conduct business contributes to your profitability, rather than detracts from it. If you are just getting into business, the decisions that surround the choice of a business facility can be particularly worrisome.

  • Do you first decide the community in which you wish to locate the business, amassing all the information on it?
  • Should you look at prospective sites and buildings, and imagine how well your business would operate in each?
  • Should you look around for geographic areas not well served by potential competitors, then "hit 'em where they ain't?"

Functions facilities must perform

It's clear that many inquiries deserve consideration as you search out a business facility. But, particularly if this is the first time that you have set out to acquire a business facility, we strongly suggest that your first move should be to map out your facility needs in some detail. To do this, you may wish to consider what small business owners generally look for in a business facility and how the facility can aid their businesses. As a small business owner, you can greatly increase the chances that you will acquire a business facility that will make a positive contribution to your bottom line if you carefully consider the functions that the facility must perform for your business. A good facility should:

  • foster efficient business operation
  • present your business in a good light
  • allow for future business growth
  • accomplish these objectives at an economical cost

The foundation of determining your business facility needs is figuring out what is required to foster efficient business operation.

What makes a business facility efficient?

No matter what kind of business you have and how you conduct it, if you own or rent a business facility, you do so in order to perform vital business functions there. This is true regardless of whether the facility houses your business headquarters and office, a retail store or a wholesale outlet, an inventory or equipment storage area, or a combination of several of these functions. An efficient facility isn't hard to define in the abstract, but tailoring the definition to an actual concrete list of needs can be more complex.

Your search for the ideal facility will go much more smoothly — and will more likely be successful — if you are armed with a firm, fairly detailed idea about your facility requirements when you actually start the search:

  • If you are presently in business. This may be a rather straightforward process if you are currently in business, and, for whatever reason, will be relocating. In this case, envisioning your replacement facility may be no more difficult than thinking about what aspects of the present facility you are satisfied with, and how you would improve upon those aspects that didn't measure up. It's likely this will be easier said than done, but at least you have had the valuable experience of seeing how your business ran out of the present facility. Your proposed solutions to any facility problems may be theoretical, but they are grounded in what you have learned from running the business.

Rich Runsfast owns a running shoe and clothes specialty shop. He currently keeps his inventory in the back room of his store, which is in a well-located strip mall. However, because he recently expanded his sales floor area to accommodate more shoe displays, his storage area has been reduced to the point where he cannot keep a sufficient inventory at the store.

Ways to deal with Rich's facility problem would include:

  • relocating the store to a larger facility that would accommodate both adequate sales display and adequate inventory space

  • renting off-site space in which to store the "overflow" inventory

  • reducing inventory needs by changing how he does business, such as by utilizing quicker delivery of special order items from suppliers

  • If you are just starting out. How do you go about making a wise choice for your business's first home? We suggest that you begin by evaluating the operating steps of your business (that is, the key things that you must do in running your business). You may feel, however, that since you are just entering the business, you don't have a firm idea about what the operating steps of your business will be. If this describes your situation, we suggest that you do whatever you can to learn as much as possible about the business before you find a facility, swing open the doors for business, and learn as you go.

Although every small business is different, most small business owners will have to consider a number of issues in selecting a business facility. Not all of the items will be important to every small business, and the relative importance of each issue will also vary. The applicability and priority of these issues are for you, the small business owner, to determine. However, you should remember that facility needs are also influenced by the general type of business (such as retail or wholesale) and other factors.

That being said, the following is a list of common small business requirements that closely relate to the choice of an efficiently functioning business facility:

  • provides space for all of your operating steps
  • is the right size, construction, condition, age, and interior layout
  • has a dock and refuse facilities, if needed
  • neighborhood issues, such as whether the facility:
  • has satisfactory security
  • can qualify for affordable insurance protection

Business operating steps and your physical site needs

The process of mapping out operating steps for your business is designed to get you thinking about your facility needs. The physical structure and layout of your facility should help you to efficiently deliver your products or services to your business customers. Therefore, before you can determine what you will need from your business facility, you'll need to take a hard look at your business and attempt to answer these questions:

  • What are the essential operating steps that you must do to bring your product or service to your customers?
  • In what logical order should these steps be done?
  • How many employees (if any) will you need?
  • Will they be using specialized machinery?

In thinking about this, don't forget about functions such as:

  • marketing
  • billing
  • collection
  • payroll
  • facility maintenance
  • security

These functions are necessary to support the essential steps. Once you have identified the essential business steps, you will want to think about how these steps (and related administrative functions) will translate into facility needs.

The process of mapping out your business's operating steps is designed to get you thinking about your facility needs. However, by itself, this process may not be enough. This is because when a business owner contemplates the operating steps of the business, he or she may concentrate too much on the physical structure of the business facility. However, in order to identify all of the business's needs relating to a facility, the business owner must also think about things beyond the structure, layout, and size of the facility. An example of such non-structural needs would be the selection of a location that is likely to bring in customers to a hairstyling salon, without whom none of the essential business steps could be performed.

Facility size, layout, and appearance

The physical structure and layout of your facility should function as a tool that helps you to efficiently do all the things necessary to bring your business's products or services to its customers. What is necessary is often based on the type of business you operate:

Retail and service businesses. Retail and services businesses that depend on customers coming into their facilities must place considerable emphasis on their appearance. The facility's exterior and interior design, decorating, and maintenance should make customers want to come into the business. Depending on the type of the business, the interior of the facility may be primarily set up to maximize efficiency (the idea being, "get them in, get them out"). This could be the objective of a tool rental business or a neighborhood convenience food store. Or the facility could be set up to encourage customers to browse through the store, hopefully finding something to buy in addition to what they came into the store to get.

Retail and service businesses vary greatly in their facility size requirements and in their need for on-site inventory or supply storage. Businesses where customers are confined to a small sales area, and that have little or no inventory storage requirements, can exist in very small facilities. This is not the case for businesses where the customers must utilize a lot of space (such as on a golf course!), or where the items kept in inventory are large and numerous (such as is the case for a new car dealer).

Wholesalers and manufacturers. Wholesalers and manufacturers generally do not have customers come into their facilities. Because of this, their facilities can be Spartan, although the effect of the facility's appearance on efficiency and employee morale should not be ignored.

Wholesale businesses often require large, open facilities that put a premium on efficient material handling. This may take the form of wide aisles and storage racks that allow the use of lift trucks, large shipping and receiving docks, and a location that gives the facility good access to transportation facilities.

Small manufacturing businesses may not require any specialized facilities, their prime need usually being enough space for their supply storage, manufacturing processes, and product shipment. The facilities of manufacturers may need to be highly specialized to accommodate heavy machinery and assembly lines.

Regardless of the type of your business, you may run into this situation. You find a facility that is well located, with a building that generally meets your requirements for size, layout, and appearance. In fact, the building is almost perfect. But, there is one thing about it that must be changed before you can use it. This could be something like adding or widening access doors, or increasing the capacity of the ventilation system. Before you jump into acquiring this almost perfect facility, there are several factors that you should consider:

  • How much would the change cost? At a minimum, you will need to get a detailed estimate of how much the additional work would cost. If the work will be costly and vital to the operation of your business, you may want to press for price or rent concessions from the seller or landlord. You should also carefully consider getting actual bids on the work, and negotiating a clause in your purchase contract or lease that will allow you to get out of the deal if the work is not completed by a specified time before closing the real estate or lease transaction. If the work can't be finished before closing, a portion of the sale price or lease security deposit should be held in escrow (that is, deposited with an impartial third party) to guarantee completion.
  • Do you have a contingency provision? Sales contract or lease clauses that provide for different terms based on the happening (or not happening) of a specified event are called contingency provisions. These type of provisions can be extremely useful, particularly when you are entering a transaction that could be financially ruinous if you "don't get it right." But to effectively protect you, such a contingency provision will almost certainly have to be customized to fit your particular situation. To do this, we strongly advise you to seek the advice of an attorney who is knowledgeable in the field of commercial real estate transactions.
  • Will the change be allowed? You'll need to investigate which permits (if any) you would need from local authorities to do the work, and whether you would need a zoning or building code variance for the modification.
  • How long would it take? If the modification to the building would be costly and would be going on as you use the building, this could have a negative effect on the operation of your business.

Meeting special facility needs for docks, facilities, and environmental concerns

Most small businesses don't have the volume of shipping or receiving to require full-blown truck dock facilities or work with environmentally hazardous materials. But if your business does, you'll need to add the following considerations to your list of criteria for selecting a facility:

  • Dock facilities. If your business ships or receives either a large number of truck-delivered items, or such items include those that are too large or heavy to be lifted off a truck bed and carried through a door, you probably need a dock facility. Some businesses, such as manufacturers, may in fact have separate shipping and receiving docks. If the flow of materials in and out of your facility is large, any inefficiency that comes about as a result of an inadequate dock facility may be passed along to other parts of your business.
  • Refuse facilities. Some small businesses have relatively small amounts of refuse, while others generate large amounts daily. If your business operation requires the disposal of food product or other organic waste, your disposal needs will be more acute. Large trash receptacles and trash compactors may be necessary. So don't agree to move into any facility until you know that you can obtain, and legally use, adequate refuse disposal equipment.
  • Environmentally damaging and hazardous materials. If your business uses, generates, or receives toxic wastes or other environmentally damaging materials (such as used petroleum products), there may be local, state, or federal disposal rules that your business must follow. Further, if you improperly dispose of hazardous materials on your facility site, federal law can require you to pay the costs of cleaning up the property.
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