If you work remotely, you probably haven’t thought much about your business location, but this is actually something that can make or break a company. Think of it this way: A fantastic restaurant with Michelin-star chefs will still probably fail if it’s tucked into a bizarre part of town with little foot traffic and no parking. People won’t go to a business they don’t know is there, but beyond that, the wrong location can put financial strain on a small business that already has tight finances.
Thankfully, finding the right location for your company isn’t rocket science. The best location will suit your budget, give your customers access and attract top talent.
Set Your Budget
Whether you’re looking for affordable office space or a brick-and-mortar location for a retail business, the cost of the location is one of the most important factors. Businesses should generally aim to spend between 2% and 20% of their gross annual sales on renting commercial real estate, but this changes based on the industry. For example, retailers should typically spend between 5% and 10% of gross annual sales on a physical location, whereas a prime law firm that finds value in a luxe address may want to spend up to 15%.
Consider the City and State
Geography is major when it comes to finding an ideal location. Different states have different income taxes, sales taxes and property taxes to consider. Would it make sense to open a retail store in a state with a high sales tax, and is your state entrepreneur-friendly in your specific industry? If you find yourself in a state that doesn’t really foster the growth of new businesses, you may want to consider moving to a different state.
Beyond that, the city is a huge factor when it comes to zoning laws, taxes, availability of labor and cost. You’ll be hard pressed to attract the top talent in tech outside of a major urban area like San Francisco or New York City, but those rents are often prohibitively expensive. For example, New York City is the most expensive, with an average cost of $6.16 per square foot of office space, while Atlanta — which is, by all accounts, still viewed as a desirable, trendy city — is the cheapest, with an average cost of $1.74 per square foot of office space.
Think really hard about what makes sense for your company. If you could be equally as successful in Chicago as you would be in New York, it may be worth it to set up shop in the former because you’ll pay half as much for office space.
Consider the Part of Town
Different parts of town have different zoning regulations, different rent prices and different consumers. Not all types of businesses will succeed in the same place. For example, if you’re looking to open a warehouse, you’d probably be better served to rent a location in a less-desirable part of town where rents are cheaper, and you get the biggest value for the amount of space.
If you’re looking to open a retail location, hair salon or any customer-facing service business that relies on walk-in customers, you should look into places that have easy access to consumers or places where foot traffic is prevalent, like a mall or town center.
Know the Levels of Real Estate
Real estate has different levels that describe the age, price, amenities and required maintenance. Most commonly, it’s split into three different categories:
- Class A properties: These are generally the highest-quality, newest buildings. They’re usually less than 15 years old and have the highest-earning tenants, the lowest vacancy rates and the top amenities. Most of these locations are professionally managed and have few or no maintenance issues.
- Class B properties: These are older buildings with lower-income tenants. They’re typically well-maintained and can usually be upgraded to become a class A property. These offer a greater value, but you may have to put in some work.
- Class C properties: These buildings are generally more than 20 years old and have major maintenance issues or are in less-than-desirable locations. These are the cheapest type of property, but you may have to put in some cash to make them nice.
The levels of real estate matter because not all businesses need an expensive class A property. If you’re a luxury gym, salon or brick-and-mortar location that relies on walk-in customers, then you certainly want to attract consumers with a nice storefront.
However, if you’re looking to rent warehouse space, running an e-commerce business or upgrading your tech startup from your garage to an office, you might find a greater value in a class B or class C property. It depends on how you’re selling your products and services to your target market, and you can skimp on the amenities if your customers aren't seeing where you work.
Mind the Facility Requirements
Does your business need specific electric wiring or lots of parking space? Consult your business plan and figure out what type of facility your business needs. This is where you can pull back some costs. For example, if you only need an occasional meeting space, you may opt to rent a coworking space like WeWork on a per-meeting basis.
Go Where Your Customers Are Located
Whether you’re opening a new location of an existing business or starting from scratch, you need to go where prospective customers are located. This may be the internet, and in that case, the location is a little less important. Either way, you’ll need to do some market research to narrow down your target market and create a successful demographic profile. When you do this, you should consider:
- Your consumer base
- How far they are willing to travel to use your services
- The locations of successful similar businesses
- The locations of local businesses your target market frequents
For example, the target market for a health food store may be fit individuals. In this case, opening up shop near a gym may make the most sense. If you’re an auto shop, you’d probably be best served by opening near a highway, which generally has the most vehicle traffic. A dealership that sells farm equipment would do better in an area with a large farming community rather than a city where farms are virtually nonexistent.
In addition, it’s important to make sure the local community has a stable economic base. If you’re opening a new location in a city that’s dominated by one industry, it could be disastrous if that industry has a downturn.
Consider Your Employees
This is a big one: You will not attract the top talent if you’re located in a place where the top talent doesn’t want to live. In this sense, location matters — even for e-commerce stores or tech startups without consumer-facing brick-and-mortar locations. Business owners should choose a location that will cut down on a time-consuming commute for employees. The ideal location has restaurants, shops and places employees will want to go on lunch breaks and after work.
You may also be tempted to save some cash by squeezing employees into a small, old building, but is that really going to help with employee morale and retention? Offices average 151 square feet per worker, and a little natural light instead of eye-burning fluorescents can only do good.
- Austin Tenant Advisors: What Should Your Annual Rent to Annual Sales Ratio be When Leasing Commercial Real Estate?
- MarketWatch: Here's How Much Your Company Pays to Rent Office Space
- Entrepreneur: 10 Things to Consider When Choosing a Location for Your Business
- CBS News: Companies are Packing Workers in Like Sardines
- Realty Mogul: What is Class A, Class B or Class C Property?