Site Selection Law and Legal Definition
For many small businesses, business location is an essential component in its eventual success or failure. Site selection can be pivotal in all sorts of businesses, including retail, service, wholesale, and manufacturing efforts. In fact, studies conducted by the Small Business Administration (SBA) and other organizations indicate that poor location is one of the primary causes of business failure in America. Conversely, a good business location can be enormously beneficial to a small firm. In the retail business especially, the adage from real estate applies: Location, location, location.
LOCATION NEEDS OF VARIOUS BUSINESS TYPES
Each of the above-mentioned business types—retail, service, wholesale, and manufacturing—have different site needs that need to be considered when settling upon a location for starting or relocating a business.
The success of retail establishments is often predicated to a large degree on their location.
Since location is so important, small business retailers often have to make significant expenditures to secure a good site on which to operate. Property owners that offer land or buildings or office space for lease or sale in already-thriving retail areas know that they can command a higher price because of the volume and quality of business that the location will bring to the company.
Many service-oriented businesses also need to operate in "high traffic" regions, but there are exceptions to this. Most home-based business owners, for example, package their talents in service-oriented businesses (software development, freelance writing, home improvement, etc.). Others, such as pest control services or landscaping services, secure the majority of their customers through the Yellow Pages, etc., and thus do not need to worry as much about their location (although location can become a problem because of other factors; for example, a service business that has to travel great distances to take care of the majority of its customers might consider relocating closer to its primary customer base). Still other service-oriented businesses, of course, rely to a great degree on their location. Dry cleaners, hair salons, and other businesses can not afford to locate themselves on the outskirts of a business district. Many of their customers frequent their business precisely because of the convenience of their location; if that benefit dries up, so too do the customers.
Whereas the primary consideration for retailers and some service businesses is to locate themselves in high traffic areas—hence the ubiquity of such businesses in shopping centers and malls—the major location concern of wholesalers is to find a site that has good shipping and receiving facilities and close proximity to transportation routes. Zoning laws are also a consideration. Most communities maintain zoning laws that restrict where wholesalers can set up their businesses.
As with wholesalers, businesses engaged in manufacturing usually have limited site location options because of local zoning laws. But manufacturers generally do not lack for options when the time comes to build or relocate a facility. Most communities have any number of sites to choose from. The key is to select the land or building that will be most beneficial to the company in the long run, taking into consideration the company's primary market, the available labor force, transportation factors, availability of raw materials, available buildings or building sites, community attitudes toward the industry, expense, and convenience of access for customers.
Small business have a number of different choices in the realm of site selection. The type of facility most often embraced by retail and many service establishments is the shopping center. The shopping center, which houses a variety of different stores (often including well-known chain stores), can take several different forms, but the best known of these is the mall. These establishments provide their tenants with large numbers of potential customers and professional marketing and maintenance services, but in return, tenants often pay high rent and additional fees (to cover maintenance costs, etc.) Many other small businesses, meanwhile, are located in smaller shopping centers that are sometimes known as strip malls or neighborhood shopping centers. These centers, which rely on a smaller customer base than their mega-mall cousins, are typically anchored by one or two large supermarkets or discount stores. The rest of the stores are usually small retail or service establishments of one type or another. The rent at strip malls is generally much less than it is at major malls, but of course, the level of traffic is generally not as high either. The small business owner who wishes to establish his or her store in a shopping center must carefully weigh the financial advantages and pitfalls of each of these options before moving forward. Other retailers or service businesses prefer to set up their businesses in freestanding locations. Restaurants, for instance, often choose to set up their business in a lone building, attracted by the lower fixed rent that often accompany such arrangements.
Another facility option for the small business is the business park or office building. Indeed, many professionals (doctors, architects, attorneys) choose this option, attracted by the professional image that such trappings convey and the ability to share maintenance costs with other tenants. Some service businesses also operate from these facilities, especially if their primary clientele are other businesses.
OTHER FACTORS IN BUSINESS SITE SELECTION
There are myriad factors that need to be evaluated when deciding where to locate a business. Settling on a site that is both convenient and comfortable for the company's primary customers is, of course, vital, but that is only one piece of the site selection puzzle. These considerations include:
- Will projected revenues cover the total costs of leasing or purchasing the site?
- Will ancillary costs associated with business establishment or relocation (purchase and/or transportation of equipment, computer wiring requirements, etc.) be prohibitive?
- Will it be possible to secure lenders to help cover costs associated with moving into the new business site?
- Are there restrictive ordinances that will unduly interfere with business operations?
- Is the facility itself in good condition (including both exterior and interior), and does it meet layout requirements? If not, how expensive will refurbishment be?
- Are the grounds (landscaping, light fixtures, drainage, storage facilities) in good condition?
- If sharing costs of maintenance/housekeeping services, do other tenants view services favorably?
- How secure is the facility?
- Is the site large enough for your business?
- Can the site accommodate future growth?
- Are nearby business establishments successful, and are they likely to attract customers to your business?
- Are regional competitors successful?
- Does the site provide for adequate parking and access for customers?
- Might the area surrounding the facility (neighboring lots, parking facilities, buildings) undergo a dramatic change because of sale and/or construction?
- What sort of advertising expenditures (if any, in the case of malls, etc.) will be necessary?
- What sort of leasehold improvements (if any) will be necessary?
- Will customer service be interrupted by a relocation? If so, for how long?
- Will major system changes (addition or subtraction of equipment or processes) be necessary?
- What impact will the business site have on workforce needs?
- Should the choice of facility reflect changes in the industry or market in which you are operating?
- Are there any existing or proposed government regulations that could change the value of the facility?
- What is the climate as far as business taxation is concerned?
- Are important suppliers located nearby?
OWNERSHIP VS. LEASING
Whether starting up a new business or moving an already established one, small business owners are faced with the question of whether to lease or purchase the land and/or facility that they choose as the site for their company. Most small businesses operate under lease arrangements—indeed, many small business owners do not have the necessary capital to buy the facility where they will operate—but some do choose to go the purchase route, swayed by the following advantages:
- Increased sense of permanence and credibility in the marketplace
- Property taxes and interest payments are tax-deductible
- Facility improvements increase the value of the business's property rather than the landlord's property
- Increased net worth through appreciation of both the business and the facility (including land and buildings)
- No forfeiture of asset at the end of term
- Ability to liquidate (lessors often have far less freedom in this area)
Of course, there are also factors associated with ownership that either convince small business owners to stick with lease agreements or preclude ownership as a viable option.
- Risk that value of the land and/or facilities will actually go down over time because of business trends (a neighboring anchor store goes bankrupt) or regional events (a flood, massive layoffs)
- Financial risks associated with purchasing are greater, and put a greater financial drain on small establishments that often have other needs (purchasing typically requires greater initial capital investment and entails higher monthly costs)
- Property can be claimed by creditors as an asset if the business goes bankrupt
PLANNING FOR THE FUTURE
An important factor that small business owners need to consider when weighing various business location alternatives is the site's ability to address the company's future needs. It is usually easier to shrink than to expand space in the same location. Thus the growing company is wise to locate in a building or a shopping center where there is room to expand without undertaking the costs of a big move. Sometimes technological considerations enter into planning. The higher lease costs of a building located on a railroad siding may be a worthwhile anticipation of volume climbing to levels where rail service will be needed either to supply or to distribute the businesses volume—or both. If relocation becomes unavoidable, it can sometimes be done in stages—moving operations to new locations one at a time.
SOURCES TO CONSULT WHEN SELECTING A BUSINESS SITE
Local assistance in selecting a site for a new business can usually be found from a number of sources. These include local utilities, some of which have departments designed to provide help in this area; local Chambers of Commerce; banks and insurance agencies; real estate agents who specialize in commercial and industrial property; and state agencies. More informal networking with members of the local business community can also provide both leads and warnings about various regional properties.
SEE ALSO Relocation
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Hamacher, Horst W., and Zvi Drezner. Facility Location: Theory and Applications. Springer, 2002.
Manzon, Gil B. Jr. "Halsey-Evans: Relocation of Operations." Journal of Business Research. July 2005.
Partovi, Fariborz Y. "An Analytic Model for Locating Facilities Strategically." Omega. January 2006.
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Wheaton, William C., and Gleb Nechayev. "Does Location Matter? Do property fundamentals vary within markets, and is this reflected in pricing?" Journal of Portfolio Management. Fall 2005.
Hillstrom, Northern Lights
updated by Magee, ECDI