Question

Please read the article and answer about questions.

International Strategies

When you are struggling to get through that first year of business, international sales are about the last thing on your mind. The U.S. Department of Commerce, however, indicates that large compa- nies account for only about 4 percent of all exporters, meaning the other 98 percent of the exporters in 2010 were small businesses.22

Entrepreneurs typically fall into three categories. There are those who realistically will never go international (for example, a restaurant owner or dry cleaner working from a single site). There are those who intentionally start international businesses23 (for example, import-export businesses), such as Peter P., the director of procurement for a Russian trading company, who saw a trading opportunity with the opening up of Eastern Europe and the former Soviet Union. Educated in the United States, he is of Ukrainian descent and speaks both Russian and Ukrainian.24 Last, there are those who think international business might be something they’ll do someday way off in the future. This section is primarily for the last two categories.

Thanks to the Internet, once a company has a website, it is essentially an international business, a whole new breed of firms known as born internationals.25 Potential foreign customers see the website and before you know it—or before you are prepared—the first international order rolls in. Even “website–free” companies aren’t exempt. A foreign visitor comes across your products and sees a need for it in his or her country, and here comes that order.

Some international orders aren’t all that difficult to handle. If the order is small enough, if the product or service is not highly regulated domestically, and if the country is one with which the United States has rather liberal trade such as Canada, the order processing may offer few or no head- aches. The customer may use a credit card or international money order, and the product ships in the mail without much more effort than figuring the extra postage. That’s okay for the occasional order, but more complex situations will require more time and effort on the part of the entrepreneur. The ideal situation is to consider and prepare an international strategy before it becomes a hit-and-miss method that is too cumbersome or before serious and costly mistakes are made.

Entrepreneurs have available to them the same options as large companies including wholly owned subsidiaries, joint ventures, licensing, franchising, and exporting. For most, though, an ex- port strategy is sufficient and is all that is covered in this section. It’s usually inexpensive, quick to start, easy to change, and less risky than other ventures. It has the additional advantage of allowing the entrepreneur the opportunity to learn about doing business abroad in case the company reaches the point of moving further. For U.S. entrepreneurs, the U.S. government offers detailed and useful help for exporters, including seminars and other training, export assistance, websites and reports, financing, insurance, and legal and collection assistance.

Putting together an export strategy involves answering three questions:

1. Are we ready? 2. Where should we go? 3. Whom do we contact over there?

There are many sources for assistance in answering these questions, and many good ones are free or almost free. One excellent resource is the U.S. Commerce Department’s report entitled, “A Basic Guide to Exporting” that can be found at www.unzco.com/basicguide.

Question 1: Are you ready to export? Exporting requires a different kind of thinking and prepa- ration from selling locally or even nationally. Are you going to target one country, a region, or the whole world? Do you know what customers want? Do you know what the import requirements are? What aspects will you handle, and which ones will you contract out? Are you ready for the costs and headaches of exporting? To see how you are coming along, you can check your readiness online at the U.S. government’s exporting site www.export.gov/, which provides extensive exporting basics, including a “readiness test” at www.fas.usda.gov/agexport/exporttest.asp.

Consider your product as well. Will your U.S. designed product fit an international lifestyle or needs? Clothing sizes are different—both in how they are numbered and what the sizes mean. A woman’s medium in the United States is an XXL in mainland China. Electrical currents are

different, as are various other safety and product standards, and the United States is one of only two countries that’s not on the metric system.27

There are several ways you can export. One is to use online services such as eBay. Approximately one-fifth of eBay’s sales are out of country.28 If you’re handling your international business this way, a lot of the rest of this section isn’t really for you until you want or need to change methods. Another is to work from personal contacts gained through school, travel, or family. Most exporting small businesses start with countries where they have had personal experience or support.29 These two methods are called direct exporting, since you are selling directly to foreign buyers or distributors.

If you want to use outside experts, there are three intermediaries who can help. With indirect exporting, you use agents, export management companies, or export trading companies as inter- mediaries to handle most of the exporting process. Direct exporters can also get help from freight forwarders. Freight forwarders are specialists in export-related activities including tariff sched- ules, shipping, insurance, packing, transportation arrangements, customs clearing, and other export details. (By the way, many agents, export management companies, export trading companies, and freight forwarders are themselves small businesses. They know exactly what problems you’ve faced and are much easier to approach than some megacompany.) The Small Business Administration’s Export Assistance Center can help you find one.

Question 2: Where should we go? The United Nations has 193 member countries in the world; chances are not all of them are right for your product. Even if your product should have wide appeal, it makes good sense to pick one or two as first markets. One of the safest bets is to consider countries that are similar to the United States—Canada, United Kingdom, Australia, for example. In those countries, you have few language issues, the culture is pretty close, the governments and economies are stable, and the people there are likely to want or need about the same kinds of products as people in the United States do. Should you decide to go further afield, those are the same sorts of things you want to look for—language and culture issues, government and legal situations, economic situ- ations, and peoples’ wants and needs. Here’s a good time to use those personal contacts mentioned earlier; if they live there, they are likely to be able to tell you if the product makes sense or not.

International marketing research isn’t cheap and can be difficult to do. Contacts are a valuable resource. Additionally, the U.S. government and world trade centers can give a lot of free or low-cost assistance. See Table 11.1 for a list of some of the major ones.

TABLE 11.1   Sources of Export Assistanc Question 3: Whom do we contact over there? You may already have international contacts through school, friends, travel, or other methods. If so, you’re ahead of the game. Even if they cannot help you with specific questions, they probably know someone who can. On the other hand, if you do not have any contacts, a lot of the government services you have already used can provide lists of poten- tial intermediaries or end users. In addition to the free services available, U.S. Commercial Services (www.export.gov) provides a number of levels of fee-based customized services. For $500, they offer their International Partner Search service, which will identify up to five potential businesses to work with you as licensees, agents, distributors, or strategic partners, and prequalify them based on your criteria. The government’s www.export.gov site offers a database of sales leads that can be searched for free by industry, region, or country. They also are the point of contact for catalog exhi- bitions which can get your product or service catalogs into the hands of potential buyers in specific markets (or at specific trade shows) overseas.

Other good ways to make international contacts are to participate in trade shows and trade mis- sions. In a trade mission, a U.S. government official takes a small group of business owners to dif- ferent foreign countries in order to help establish relationships and promote exporting. There are not a lot of these missions, and they are usually specific to a particular type of business and region of the world, so they are not always appropriate. At an international trade fair, similar to domestic trade fairs, you have a booth displaying your products or services and the opportunity for exposure to thousands of potential clients. Again, some fairs are industry-specific, while others are more general. The U.S. government often has a U.S. pavilion featuring export-oriented companies. These companies often have the opportunity to tie into other U.S. government services such as meeting with local U.S. embassy officials, prearranged meetings with qualified customers, market research information, trade barrier information, transportation and customs information, and assistance and access to U.S. trade show experts. Even if you can’t exhibit in the fair, attending the fair may give you a chance to meet the sort of people you need to know.

The U.S. government through www.export.gov also provides such services as printed and video catalogs, online databases, and personalized (fee-based) contact services. The U.S. Commercial Service will also assist a company in arranging private promotional activities, including exhibitions, press releases, and receptions when appropriate.

Still another way is to look for foreign companies with a resident representative in the United States, a type of private importing agent. Often these representatives are interested in bringing U.S. products back to their home countries and will already have a good idea if your product is right, and how to promote and distribute it.30 To find these resident representatives, try a Google search with the terms “resident representative” US, importing-site:.gov.

The next step is to export your products. But there are a few other things to consider first. Pricing becomes complicated as you need to cover transportation, the additional documents you may need,

possible tariffs (taxes on incoming goods), potential currency valuation changes, the cost of convert- ing currencies, and the additional packaging necessary to ship abroad. The importer usually covers foreign taxes, tariffs, additional shipping charges, port handling fees, and the like, but this must be carefully spelled out in your contracts in order to avoid potential differences of opinion.

Shipping documentation and other paperwork are very specific to the product and the country to which it is going. The International Trade Administration (www.ita.doc.gov) provides extensive information about tariffs, taxes, specific country information, and other general exporting informa- tion. The U.S. Country Commercial guides also provide some assistance in this area, as do some country government websites. The Bureau of Export Administration (www.bxa.doc.gov) provides information about when export licensing is necessary and also information on exporting of politi- cally sensitive products. In addition, companies such as NetShip (www.netship.net) have arisen specifically to handle shipping and documentation issues for e-commerce.31

There are a variety of payment procedures available. The easiest for you is to require up-front cash payment prior to shipment (or credit card if appropriate). This eliminates your risk, but puts the customer at risk. Providing credit to your customers reverses the risk, and puts it all on you. Both of these are possible methods of receiving payments, but less often used. More typical meth- ods include letters of credit or documentary drafts. In both cases, the payment procedure now includes four parties—you, your customer, and both of your banks—and payments are made upon proper presentation of certain documents, including the letter of credit or draft, bills of lading, and other paperwork. Although the system is somewhat complex, it provides a lower level of risk for all parties than cash in advance or an open account. You can find assistance about these methods at your current bank.

Financing and insurance become important because of the length of time it may take for interna- tional payments to be processed and the risk of default, as well as the difficulty of recovery in case of default in international transactions. The Small Business Administration (www.sba.gov), the Ex-Im Bank (www.exim.gov), and the Overseas Private Investment Corporation (www.opic.gov) provide loans and insurance to cover exporting. In some cases, these loans may also be used to finance trade show participation, to translate brochures and catalogs for international distribution, to renovate or expand existing facilities necessary to produce products for export, to set up lines of credit for potential customers, to provide export working capital, and to provide funding for developing an export program.

Last is the consideration of conflict resolution. Although the possibility exists for pirating, prod- uct misuse, and other unfortunate occurrences, the primary areas for conflict resolution include nonpayment and contract default issues. There is no universal court of law that can handle these situations. The U.S. Department of Commerce can provide advice and offer reputable local coun- sel, but only for sizable losses, typically several thousand dollars or more. The U.S. Council of the International Chamber of Commerce (www.iccwbo.org) provides international arbitration services and offers some other suggestions, but arbitration, too, is costly and probably not worthwhile un- less the loss is significant. This difficulty in international dispute resolution underscores the need to carefully select partners and to do a thorough job of prescreening. This is an area in which various government agencies can help you. The U.S. Commerce Department, for example, prequalifies potential customers in many cases prior to recommending them; you should check the particular program specifics to verify. Ex-Im Bank provides credit information on potential customers and, as mentioned earlier, many agencies provide insurance for export payments.

Importing

Importing strategy is similar to exporting, but with the buyers and sellers reversed. Instead of cus- tomers to buy your products, you are looking for sources to sell products to you (which, of course, you’ll eventually resell). If you have the opportunity to travel abroad, look for products that are selling well in the country you’re visiting and aren’t available in the United States or products that are considerably cheaper than similar ones found in the United States (labor and manufacturing costs are often cheaper in other countries than the United States). Trade mission and domestic and international trade shows are also good sources. If you can’t travel, ask your international contacts for this information. Next, find out who manufactures them and write the manufacturer a letter, introducing yourself and your company and the potential you see in your market for its product. You’re selling yourself, so be sure to tell the producer why you are the best person or company to be representing the product (i.e., experience in that product or in importing, contacts and distribution systems already in place, familiarity with the market, etc.). International mail can be painfully slow, so a fax or e-mail letter is probably best. Also, avoid slang terms (e.g. “your product is da bomb!”) and idiomatic expressions (like “break the ice”) that are likely to be misunderstood. Since English is rapidly becoming the language of business, a translation is usually not necessary. Follow up with a phone call or visit in which you can pitch the specifics of your marketing plan for the product.32 One way to conduct international calls for free is to register for Skype, an Internet service which lets you use a broadband connected computer to call other Skype users for free (www.skype.com). If you and the overseas company both use Skype, having long conversations to get an understanding of each other will not pose a financial problem. Along the same lines, it is worthwhile these days to check to find out whether an overseas company has video capabilities. Video cameras for PCs are inexpensive, and videoconferencing services are often available on campuses or at commercial locations such as FedEx Kinko’s for low costs.

With importing, many of the paperwork and insurance details will be your source’s responsibil- ity. Import buying works the same way as export selling, that is, the same sorts of paperwork and procedures are followed only in reverse.

Concluding Thoughts on International Business

One of the major mistakes commonly made by U.S. businesspeople (entrepreneurs or major compa- nies) is being insensitive to cultural differences. You’re likely to make some mistakes, but take time to learn at least the basics about the culture you’re dealing with to avoid the biggest errors. Travel guides and U.S. government country reports often offer brief cultural assistance as do books such as Kiss, Bow or Shake Hands and a plethora of “doing business in ———” guides.33

Although international business might seem a little daunting with all the paperwork and regula- tions, small businesses just like yours do it every day. There’s a lot of free or very inexpensive help out there; make use of it.

Location

When you ask real estate agents the best three things to look for in a house, they will tell you, “Loca- tion, location, location.” The same holds true in your business. What location—in particular, good location—means for your business is highly dependent on what your business is, the amount of money you can afford to budget for it, your particular business philosophy, and the marketing niche you are seeking. Let’s start with some general information about location, then move onto specific issues for services (including retailing) and manufacturing businesses. We then discuss some spe- cific choices such as site selection and layout and the buy, build, or lease option.

The first choice, and often only choice, for many entrepreneurs is their hometown because it offers convenience and a familiar setting, and it eliminates a lot of possible family issues. There may also be valid business reasons for this choice: The local banker knows you and is more likely to loan you money; you know your market—the potential customers in the area—and understand their wants and needs; you have seen an unmet need that you can fill; and, for many entrepreneurs, friends and family (usually local) are often the first customers and are great at spreading the word about your business. (Remember that word-of-mouth is often the first method of getting to your customers.)

There may also be some compelling reasons to consider a different location. What are the busi- ness laws like in your area? Local zoning ordinances specify what sorts of businesses are allowed and not allowed in specific locations.34 Certain types of businesses—usually those deemed hazard- ous or that produce foul odors—may be banned or severely restricted. State and local pollution standards, worker’s compensation, wage rates, and other such legislation might increase the cost of doing business to the point that other locations become much more favorable. State and local taxes in particular vary considerably from state to state. For example, Wyoming has no personal or corpo- rate income tax, while California has relatively high rates. On the other hand, certain locations often offer attractive incentives for new businesses ranging from tax credits to low-interest loans, from favorable business laws to business incubators (discussed later). Most of this information can be found on the Internet. Try the state or city business development office (a good place to start is the Federation of Tax Administrators’ state list at www.taxadmin .org/fta/rate/tax_stru.html) or the local chambers of commerce (look in the phone book or at www.uschamber.com/chambers/directory/default to find your local Chamber affiliate). There is also information by state available for your state at business.USA.gov, and the Small Business Ad- ministration offers links to state-based resources at www.sba.gov/category/navigation-structure/ counseling-training. Site Selection Magazine’s website (www.siteselection.com) has a number of tools that can help you find the right location. Many of these require being a registered user, but registration is free.

Other reasons to consider other locations are tied to your customer. Your hometown may not be the best place for you to find your target market customers. Are you close to the people who will use your product or service? Other considerations include population growth or decline (especially in your target sector), income levels, and predicted increases or decreases in income. Is the location expanding economically or slowly dying? Perhaps the best source for this infor- mation is the US Census Bureau. State and local municipality business development offices may also carry such information, but they are likely to be slanted toward attracting new businesses. Being positioned to benefit your customer can also be key. Zappos’s primary distribution hub was placed in Louisville, Kentucky, to be close to a major UPS air cargo hub in order to speed delivery.

Also consider the type of business you are planning. Do you need skilled labor? If so, what areas will provide you with the necessary employees? Do you need to be near raw materials or particular methods of transportation? These issues will help determine your choices. Where are your competitors? Certain industries tend to be clustered in certain regions where they can make efficient use of services and employees. Think of California’s Silicon Valley or the financial district of New York City.

Doing business in your hometown may be perfectly appropriate; however, the cost of moving a company—whether across town or across the country—can be very expensive. It pays to plan ahead.

Service Firms

There are three typical locations for services: at the client’s location, at a mutually accessible loca- tion, and at your firm’s location. Traditionally, services may have been tied to one or another of these, but marketing niches have been carved out by people daring to be different. Typically, dry cleaning and restaurant dining are services provided at a place accessible to both parties, but some dry cleaners now offer pick up and delivery from the client’s home, and not only pizza restaurants offer delivery these days. Thanks to the Internet, video rental like Netflix.com and other services are handled electronically, and the customer and service provider may never meet face to face. Whatever innovative niche you select, there are a few things to keep in mind.

At the Client’s Location

Typically, these services include things such as house or office cleaning, pest control, remodeling, lawn and gardening services, carpet cleaning, and similar services which must be performed at the client’s location. Business headquarters can be a home office with enough room to store and maintain any necessary equipment used in the service. Reliable transportation, preferably modified to organize and store tools efficiently, is imperative. More importantly, the range of your client’s locations must be planned to prevent transportation times from being unmanageable. For example, facing a one-hour drive to a client’s location might mean you have tied up two hours in commuting. If you cannot charge for travel and do not have other clients nearby, it means you have two hours in which you cannot make any money that day.

If you’ve done your homework carefully, you already know the geographic area(s) most likely to use your service. Certain services may be organized into a rotating schedule. For example, a house cleaning service may clean a certain set of neighborhoods on Monday, different set on Tuesday, and so on. In other cases, more remote clients may be charged a transportation fee. In some cases, a mile- age fee may be appropriate for your business (delivery services, for example).

As the firm grows, it may outgrow its home-based headquarters. As your clients seldom, if ever, visit you, you have more latitude in where you can be located and the ability to seek out low-cost space (see site selection section below). Reasonable distance to the clients and adequate storage room for your expanded fleet and equipment are key to choosing a site.

Mutually Accessible Location

Services using this approach often have too much specialized equipment to be readily transported and a need for at least some client involvement. Barbershops, dentist offices, video rental stores, and restaurants are services typically located at a site that is extremely convenient for the client and reasonably so for the owner and employees.

Even though your service may be traditionally located in a mutually accessible area, consider what you might do to make it home-based (see Chapter 5). Your watch repair shop might generate clientele by being located in a shopping center, but will the added sales be offset by the high cost of rent, utilities, insurance, and other payments? Can you offer pickup and delivery and do the work at

home? Your restaurant idea might work as a catering service. Instead of a specialized clothing shop, why not try mail order or Internet-based sales?

Remote Location

In this type of service, face-to-face meetings with the client are infrequent. Typical services that meet this criterion include medical transcription, data processing, fulfillment centers, and some consulting work. These services generally are ideal for home-based businesses. Certain services, for example, fulfillment centers, generally take more space—at the minimum, an attic, garage, or basement. The biggest advantage of these sorts of businesses is that they can be located anywhere in the world. U.S. hospitals, for example, use medical transcription services located in India. One such company, Infoflow/TSVI, operates from a U.S. sales base (which makes handling calls from U.S. hospitals easier) with transcription being done in India, managed there by a co-owner, who is a cousin and long-time friend of one of the two American owners (www.tsviinc.com).35 Other than perhaps some initial sales meetings, all business is transacted via phone, fax, electronic exchanges, or mail.

Manufacturers

What if you are selling a product and not a service? What are your considerations about location now? Where you make the product is really dependent on the product. Some products that do not require a lot of specialized or bulky equipment can be produced at home unless zoning ordinances forbid it. In addition to whatever office space is needed, adequate work space is also required. The basement, a garage, or a home workshop may be adequate for some time. As business expands and as you add employees, it will become awkward if not illegal to continue production at home (see Chapter 5).

Some products require bulky and specialized equipment, utility demands atypical of homes, or sizable warehousing requirements and are never suitable for home businesses. Certain production characteristics—for example, use of hazardous materials and materials with strong odors or noisy operations—may make a home-based business undesirable. Many cities have zoning ordinances prohibiting manufacturing in residential areas. When you start to hire employees, providing the amenities they will expect or that are required by law will usually require moving the business from your home.

Contract manufacturing might be a better option, at least for awhile. In this case, a firm with the capabilities to produce your product is contracted to manufacture it for you, usually for a flat per unit fee and a possible setup charge. Some firms will also assist in marketing and sales as well. Trade magazines in your field often list ads for contract manufacturers. An interesting possibility here is to use sheltered workshops to perform light manufacturing or assembly sorts of businesses. These workshops exist in nearly every state and offer very competitive pricing, often including tax benefits for the business.

Site Selection

Once you have determined the general location of your business, you need to determine the exact location for your operation. What you should look for falls into three main categories: home-based businesses (covered in Chapter 5), high customer contact (e.g., retail), and low customer contact (e.g., manufacturing). Each has certain criteria to be considered.

High Customer Contact Businesses

Businesses with high customer contact include such diverse operations as medical or legal offices, restaurants, retail establishments, dry cleaners, and other businesses that are highly dependent on being convenient to the customer. For these operations, there are three critical site selection consid- erations: traffic, customer ease, and competition.36

First of all, you want a site that is convenient to your target market and to enough of the customers to make you profitable. If you are considering a franchise, many will offer site criteria to help you make your selection. If you are going it alone, consider the population density of the area and how many of the people in the area meet your target market criteria. The U.S. Census Bureau website

and a number of free nongovernment sites like www.zipwho.com and www.city-data.com can be a good starting place for free information. See Skill Module 11.2 and the Online Learning Center. If plowing through the Census Bureau website doesn’t get you what you want, several commercial services mentioned in Chapter 10 including Prizm and ESRI will sell you data about the population in a particular zip code for several hundred dollars. More detailed and specific commercial infor- mation is also available and can range in price from several thousand dollars to over $100,000 and is probably not an option for most entrepreneurs.37 Again, the website of Site Selection Magazine (www.siteselection.com) mentioned above has tools and additional articles that can help. Another consideration is the presence of traffic generators in the area. These are other busi- nesses that draw customers to the area and may include supermarkets, office complexes, schools, and malls. If the customers are drawn there, for example, to grocery shop, might they not stop at your video store next door? Reflect on the type of customer you are seeking and the likelihood of these businesses in attracting them. If you want a teen customer, a location near a high school works well. If you are looking for evening clientele, offices that close at five aren’t the right traffic genera- tors for you. Drive around likely areas and locate possible sites. Visit during the hours you anticipate to be peak times for your business and evaluate foot and car traffic.38 Look at the crowds or lines in similar businesses and decide whether there is room for you. If most businesses seem empty, you probably will be too.

Intersections of major streets offer high automobile traffic, but because of divided roads and other barriers, they may not make it easy for your customers to get to you. Businesses along inter- states have high visibility, but the frontage roads can be so convoluted that the clients seek easier- to-get-to competitors. Even some malls and shopping centers have such tortuous access problems that customers avoid them when possible. Sometimes entry is easy, but getting out is difficult. For example, no signals for left turns when most of the traffic needs to head in that direction can turn off customers.

Parking is also an issue. Is it conveniently located to your place of business? Do customers need to cross busy streets to get to you? Is parking free or paid? Are parking areas well lit and safe? Are there wheelchair ramps or other accommodations for disabled customers?

Customers have strong ideas about how far they should have to drive for things. These vary some- what from major metropolitan areas to more rural towns and from one region of the United States to another. Generally convenience stores, fast-food restaurants, and gas stations need to be close to con- sumers. Grocery stores and banks can be somewhat farther away, but not much. Discount stores and midscale restaurants can be even farther away, while specialty stores, upscale restaurants, and malls can be relatively remote. Where does your business fit? How far are customers willing to drive to get to you?

Malls are great traffic generators, but space at malls is costly. If it is appropriate for your product, you might consider a kiosk or cart in the mall as a way of testing the market and location without making a large investment.39 Neighborhood shopping centers (those anchored by a supermarket, drugstore, or major retailer) or strip centers (shopping centers without major anchors) are more modestly priced, but lack the drawing power of malls.4 Generally, competition in the area can draw away valuable clients, but this is not true in every case. Many cities have a restaurant row, an antique district, or an automobile mile (as well as other business types) where many competitors cluster. Clients wish to comparison shop or have choices and are drawn to areas where they can see several similar businesses at one time. Locating far from these will mean that you are free from competition, but this benefit may easily be offset by the cost of at- tracting customers to a different place. Additionally, you can capitalize on competitive advertisements that bring potential customers to the area. Your competitor’s high-budget TV ad might get customers to the neighborhood, but the “sale” sign in your window may get them to stop at your place instead.

Another instance when you want to be near competitors is when your business provides a strong contrast to the competition in the area. Do you offer better assistance, additional services, unique advantages, or other benefits that can easily be seen by customers? They may be drawn to the area by a well-known competitor’s name, but they may select your establishment instead because of what you offer that differentiates you.

Low Customer Contact Businesses

Generally low customer contact businesses are manufacturing businesses, the headquarters of client location-based services, or remote location services. Customer access is relatively unimportant. More critical are access for your employees, reasonable cost, and the space necessary to do your business. Certain manufacturing operations will need adequate utilities and specialized transportation too. Unless you plan to use some of this space as a high-traffic showroom, commercial space in a business park or light industrial park might be appropriate. These parks are located near major transportation routes, often have rail spurs, and are designed for industrial utilities; that is, they have adequate electricity, gas, water, waste water treatment, and the like. Frequently, support businesses will be located in or near the park such as warehousing, shipping firms, copy centers, and office supply stores. Industrial or business park space tends to be cheaper in smaller cities and rural towns than in major metropolitan areas. If distribution to customers can be arranged, these locations are certainly cost-effective.

Some major metropolitan areas offer empowerment zones. These zones, often in economically depressed areas, offer businesses low-cost space and tax advantages for locating there. For more information, see www.rurdev.usda.gov/BCP-EZEC-Home.html or www.siteselection.com.

A third possibility is a business incubator. The National Business Incubator Association (www .nbia.org) shows over 1,400 business incubators in North America sponsored by government, uni- versities, or private investment groups. These business incubators are specifically designed for the entrepreneur, and, in addition to relatively low cost space, they offer a multitude of small business support services. These services range from copy machines, faxes, and conference rooms to ac- counting, finance, and consulting services. Since the building is populated by other entrepreneurs, it’s a great place to talk to others who might have had some of the same problems or to brainstorm new ideas. Most incubators require a stake in your company in exchange for their assistance— maybe as much as 50 percent—and often have quite a bit to say about how you run your business. Opinion is mixed on how much real help a company can get; just like all businesses, there are better and worse incubators, so do your homework.42

General Comments on Site Selection

How do you go about finding potential sites? Looking for “for sale” and “for rent” signs is a start, but not all space will be advertised that way. Just as a good real estate agent can warn you about the pro- posed freeway project going through the backyard of the house you are considering or let you know about houses not yet listed but likely to be, an experienced real estate broker will also be able to assist you in your search for your business location. Many have relationships with landlords that can work to your benefit. They are also likely to have at least some of the market statistics you may need to help you decide if the location is right for your business.43 Level with them about what you can spend. You have your business plan and know the cost per square foot you can afford and be profitable. If you are looking at property more expensive than that, you’ll need to cut corners elsewhere.44

Leasing

It is rare that a small business start-up buys its first location. The reason is financial. It takes a lot of money to buy a place, and beyond that a long-term commitment to pay for it. For most small busi- nesses, it is not a worthwhile risk. It makes more sense to rent or lease your facility to leave more money for other aspects of the business. But leasing is one of the most complex of the issues an entrepreneur faces when starting a business.

In reality, most landlords (especially those from big national commercial real estate and mall companies) have fairly standard contracts which they don’t like to change. These typically start out as very pro-landlord. That said, in many cases they are also likely to accept certain standard clauses that are more tenant-friendly. However, it is unlikely they will offer those. You will need to ask for them. In this section you will learn about the major types of tenant-friendly clauses you might want to seek. However, it makes tremendous sense to get a real estate lawyer involved to help you. They should be able to tell you what kinds of clauses are typical, and who else offers them in your area, and if there are any other likely traps in the lease. You can learn how to choose a lawyer in Chapter 18.

You should start the leasing process by looking for locations. You can start using the local news- paper’s or business journal’s classified ads for commercial real estate. If you know of a great loca- tion, but there is no “for rent” or “for lease” on it, consider asking the owner or current renter about subleasing a portion of the location. If your product or service complements the current tenant, you could find a home. Local real estate websites may also have listings, and there are national websites like LoopNet.com which compile listings from a variety of sources. There is a how-to video for

using LoopNet on the Online Learning Center. You may contact a real estate agent with commercial experience to help you, but make sure you know how the agent is making his or her money. You want the agent to work in your best interests.

It helps to have two or three possibilities identified before you begin negotiating leases. This is a use of the idea of the power of rivalry from Chapter 7. This gives you a basis for comparison, and an alternative for leasing when negotiating. But note that the more alike the properties, the greater your power at the negotiating table. Also, if you are opening a franchised operation, you will want to contact your franchisor before you start looking for locations. Most franchisors have specifications for locations, and advice on costs and other features. They often have a lease review department to help you with this process.45

The best way to start thinking about the clauses is to separate them into those clauses related to choosing a property, day-to-day operations, and endings. In reality, though, all of these clauses will get negotiated when you and the landlord discuss the lease agreement.

There are several issues that could pop up as you are narrowing your choices and trying to decide which location and deal is the best for you. These are:46

?          “As is” versus compliant property: If the location has problems, who should fix them? The landlord would like to have you do it, and will try to push you to accept the property “as is.” You, of course, want the landlord to fix it before you move in, so you would ask the property to be “in compliance with all applicable laws, rules, and regulations.” Realize that the landlord will get back the money paid for repairs eventually, through fees or higher rents, but it can save you money on the front end.

?          HVAC: This is the commercial jargon for “heating, ventilation, and air conditioning.” It can be the most expensive type of repair, and since it is mechanical, one of the types most likely to go wrong. The landlord wants it to be your responsibility. You want it to be the landlord’s. This is particularly important if the location has a central air system so everyone shares the same air conditioner and heating equipment. This type of equipment needs to be the landlord’s responsibility. For any type of equipment, you want the landlord to at least guarantee the first year of operation.

?          Signs: Called “signage” in the business, it can be on the street, on the building, or around the door. You probably have ideas for your signs. If you are a franchise, you face signage require- ments from the franchisor. You want a landlord who will work with you on the size, place- ment, and visibility of signs. Make sure you have written

agreement on the signs and, if possible, a clause that says approval cannot be unreasonably denied for future changes.

There are other benefits possible if you know to ask for them. Often these are called concessions. Examples include “leasehold improvements,” which are permanent changes made to the loca- tion to fit your business’s needs. You cover these by seeking a “tenant improvement allowance” or “construction allowance” which are rent dollars (typically $5 to $25 a square foot) they agree to let you put into improving your location.47 This amount should be based on a firm estimate from a construction profes- sional. Another concession is a “rent-free use period” which cov- ers the time while you prepare your location prior to opening.

As you start thinking about how you would operate day-to- day, there will be several different issues you will face. These include:

?          Hidden charges: Many leases include charges that do not have to be listed in the term sheet given you for the prop- erty. An example is a monthly operating expense. This may be justified. You may be leasing a thousand feet of space, but there are also common areas, restrooms, parking and the like that the landlord keeps up for everyone. Ask spe- cifically for a list of all expenses or charges for which you will be liable, and compare to other locations. Also make sure to learn the conditions under

which you can lose all or part of your security deposit. ?     Use of premises: You specify in the lease what you will sell or do at the leased location, but

too exact a description could prevent you from expanding the products or services you offer. Try to add the clause “and related goods and services” to any description you give to provide reasonable flexibility.

?          Noncompete: If you have a pet store in a strip mall, you’d like to be the only one there. For many types of businesses, you negotiate a clause limiting the landlord’s ability to lease to a competing business. This can be just for your facility or for a radius. You should expect to pay for the exclusivity and the farther you want it, the more it will cost. Note that competition in terms of different types of restaurants, or another store selling some of your products, is still likely.

?          Hours of operation: Mall landlords want stores open the same hours and days, and landlords of other types of properties may have some of the same desires. You need to negotiate times that fit your business model. Look for stores in the landlord’s properties that match your hours. Precedence helps here.

?          Rent default: When you are late paying rent, all sorts of penalties and problems emerge. It also hurts your credit rating. Some leases require the renter to keep track. Ask to change the lease to specify the landlord needs to alert you immediately on the rent due date in written or telephonic (usually fax) form, and get the 5–10 day default period for paying rent before default starts from that notice.

?          Moves and remodels: There may be a clause that gives the landlord the right to move your business elsewhere, at their discretion. If this is to update or repair an area, fine, but what if it is to get a higher-paying tenant in your space? Set time limits and return rights on any forced move. Similarly, if the landlord decides to remodel, you should not have to pay for it.

As an entrepreneur negotiating a lease, you need to prepare for the good and the bad as time moves along. The good is the prospect your business grows and you need more space. The bad is that your business doesn’t do well, and you need to get out of your lease before the end of the term. Dealing with these issues is like worrying about a prenuptial agreement while you are taken with the romance of getting married. It might be painful to imagine, but it is important to keeping what is yours.

If your business falters, you are obligated to continue paying your monthly rent and fees for the duration of the lease. A landlord has the power to let you out of a lease, but he or she is only likely to do this if a better tenant is lined up. Once you tell your landlord you may need to vacate the prem- ises, she or he is supposed to look for a replacement tenant, but not all do, or do a good job of it. If you can find a replacement tenant, it can help this process along, but you need to make sure there is a clause that lets you sublease the property, and further, that the landlord can’t unreasonably deny the sublease. If your pet store is closing, finding a dress shop is probably reasonable (as long as it doesn’t violate some other tenant’s noncompete clause), but finding an adult book store is probably not a reasonable replacement.

Three other ways to handle an early termination are to set up a short-term (e.g., 6 months) lease initially, ask for a bailout clause, or for a “cap” or limit on how long you need to continue paying rent. The bailout clause lets you out of the lease if sales do not meet an agreed-to level. You negotiate this with the landlord up front. To understand a cap, think about a three-year lease. If you close down after only six months, you are still obligated to pay 30 more months’ rent. With a one-year cap you are only obligated to pay 6 months’ more rent. This is like a type of insurance, and like insurance policies, you will probably have to pay a slightly higher rent from the start to cover this possibility.

Realize there can be problems you face caused by the property itself. What if you move into a mall with a major chain like Sears, Penny’s or Macy’s, or a strip mall with a major supermarket or discount store. Part of what you are paying a premium for is the traffic and reputation these anchor stores bring. What if they leave? Your location’s quality could dramatically drop. To get out of your lease under these unfortunate circumstances, you want to ask for a cotenancy clause.

Although we’ve segmented a renter’s concerns by stage of the leasing process, all of these issues need to be negotiated at the start when crafting a lease. Although landlords often start with a lease they call “standard,” nearly everything about it can be negotiated. But be fair; the space may mean a lot to you, but it is a drop in the bucket to large commercial realtors. You can learn more about negotiating in general in Chapter 18, but there are some special considerations for lease negotia- tions. Because so many aspects are potentially negotiable and areas have different norms for what are typical tenant-friendly clauses, work with a real estate lawyer of your own to help you in the negotiation and phrasing of the lease terms.

Layout

Since so much of this is particular to the type of business you are in, what you’ll read below is a general guide. Check out competitors or similar types of businesses to see what you like and don’t like, what seems to work well, and what seems to cause a lot of problems. In addition, certain categories—restaurants and retailing, for example—have numerous books from college textbooks to do-it-yourself books, like the “For Dummies” series. Try your local library or bookstore.

The layout of a potential site must be considered carefully. Is the building setup appropriate for your use? A restaurant will have different needs than a retail area or a manufacturing plant. The amount of area allocated to the “front room” (e.g., eating or retail areas) versus “back room” (storage, kitchen, warehouse, and office areas) needs to be adequate for the purpose of your business. If you are operating a restaurant or retail operation, how important is space in the front room? A coffee shop or fast-food restaurant squeezes in more customers per square foot than a gourmet restaurant. Do you need specialized areas, such as a kitchen or laboratory that are expensive to retrofit into existing buildings? Is there adequate storage area? How much dock space is appropriate for your business? A manufacturing firm usually needs more dock space and storage than a retailer or a restaurant, while a service company may need very little of either. Retail operations need display windows, while manufacturers do not. For restaurants or other services, this need varies. Is there room for expansion should the business grow? Remember: Moving can be expensive. A good strategy is to rough out the desired layout of your operation on graph paper to get a basic idea of the square footage needed and how it should look. What exactly you want may not be out there, but you’ll be able to see what’s close and what’s impos- sible to live with.

Consider the amenities that are already there. Carpeting may be appropriate for a retail area and perhaps the office or dining area of a restaurant, but not appropriate for manufacturing or cooking areas. What about the walls? What sort of ceilings and lighting is appropriate? Again, a visit to the competition will help you decide what works and what doesn’t, as well as where you want to be different.

Check the exterior, too. Is the building attractive and inviting? Are the sidewalks and landscaped areas in decent shape? Is parking adequate, well lit, and safe? Is employee parking separate from customer parking? What about handicap accessibility? The 1990 Americans with Disabilities Act (ADA) specifies that businesses (with few exceptions) must accommodate persons with disabilities. Many buildings have been brought up to code, and all new construction should meet the require- ments of this act, but keep your eyes open.

Once the building has been selected, how you lay out the interior also needs to be considered. While retailers, restaurants, offices, and manufacturers all have different layout needs and consider- ations, two facts hold true: (1) layouts need to be designed so as to eliminate unnecessary and exces- sive employee movement, and (2) the layout says something about who you are to your customers, employees, and visitors. In retailing, this last factor is called atmospherics. While the opportunities for variation are limitless, let’s consider the major types of retail and manufacturing layouts as well as what atmospherics might mean to a business.

Traditionally, manufacturing processes are laid out in one of two formats: production line layout and process layout displayed in Figure 11.2. In the production line layout, material flows in on one side of the operation and continues to the other end of the operation. Most assembly manufacturing is done this way, often with conveyors moving subassemblies from one station to another. Although a rather rigid flow, it works well for mass production and high-volume manufacturing. The second method, process layout, groups similar machines/or functions together, not unlike a typical machine shop. This format is much more appropriate for lower-volume, flexible manufacturing.

There are also two traditional layouts for retail operations, which are shown in Figure 11.3. The first one, the grid layout, has aisles running from the front of the store to the back like the typical grocery, discount, or convenience store. It’s a very efficient and organized layout although it lacks some visual impact. The second layout, the free-form layout, alleviates this problem. In this layout, the store is laid out in sections with aisles that angle or meander through the store. This is the layout more typically found in upscale department stores, clothing stores, and the like.

Atmospherics include all the ambiance items that might be considered in your business. An up- scale women’s clothing store is likely to have wider aisles, deep carpeting, soft “elevator music,” indirect lighting, and, perhaps, a lightly perfumed aroma. These are appropriate atmospherics for the target market. A shop catering to edgy teen fashions may be done in black and chrome with loud rock or alternative music and strobe or black lights. Both of these send a message about whom the store is likely to appeal to. Restaurants use atmospherics, too. Compare a family restaurant to a gourmet restaurant to an ethnic restaurant. Services and the office and public areas of manufacturing firms do this as well in their choice of colors, furniture styles, and background music.48

Build, Buy, or Lease49

Ultimately, there are three choices available to the business: build, buy, or lease. Building has the advantage of having the perfect layout in the perfect location and the street appeal of a new build- ing, but it is costly and slow. Buying something already in existence shortens the time and may be

somewhat cheaper, but any remodeling or retrofitting that needs to be done may overshadow any time or money savings. In both cases, though, business owners have an asset that they can leverage, as well as the depreciation tax advantage. They have the flexibility to make the changes they need and know what the long-term costs will be.

Leasing, which we detailed earlier in the chapter, is an option with a considerably lower initial cash outlay, and it is often the only feasible choice for new businesses. Lease expenses are deduct- ible business expenses. One of the main downsides of leasing is that you are usually limited in the renovations you can do. Another one is that leases tend to get higher with each renewal contract, and your landlord may choose not to extend a lease, forcing you to move before you are ready to do so.

The issues of location and distribution are decisions that business owners make only occasion- ally. Many businesses operate from the same location for their entire existence. Distribution deci- sions may come up more often. For example, a business started on eBay develops its own website, and then grows into a store in the city’s commercial center. Regardless of how often these decisions are made, they are central to the success of the small business, because placing a business in the right location and equipping it with the right channels of distribution are essential to finding and connecting with customers. Done right, managing the issues of location and distribution can turn an average firm into a major success.

1. According to this chapter, what are three key considerations in determining the location of your business?

2. According to this chapter, what are the typical locations for service businesses?

3. What are the advantages and disadvantages of buying, building or leasing your business’ facility?

Answer 1