Please read the article and answer aboutquestions.

International Strategies

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

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

Thanks to the Internet, once a company has a website, it isessentially an international business, a whole new breed of firmsknown as born internationals.25 Potential foreign customers see thewebsite and before you know it—or before you are prepared—the firstinternational order rolls in. Even “website–free” companies aren’texempt. A foreign visitor comes across your products and sees aneed 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 nothighly regulated domestically, and if the country is one with whichthe United States has rather liberal trade such as Canada, theorder processing may offer few or no head- aches. The customer mayuse a credit card or international money order, and the productships in the mail without much more effort than figuring the extrapostage. That’s okay for the occasional order, but more complexsituations will require more time and effort on the part of theentrepreneur. The ideal situation is to consider and prepare aninternational strategy before it becomes a hit-and-miss method thatis too cumbersome or before serious and costly mistakes aremade.

Entrepreneurs have available to them the same options as largecompanies 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 thissection. It’s usually inexpensive, quick to start, easy to change,and less risky than other ventures. It has the additional advantageof allowing the entrepreneur the opportunity to learn about doingbusiness abroad in case the company reaches the point of movingfurther. For U.S. entrepreneurs, the U.S. government offersdetailed and useful help for exporters, including seminars andother training, export assistance, websites and reports, financing,insurance, and legal and collection assistance.

Putting together an export strategy involves answering threequestions:

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

There are many sources for assistance in answering thesequestions, and many good ones are free or almost free. Oneexcellent resource is the U.S. Commerce Department’s reportentitled, “A Basic Guide to Exporting” that can be found atwww.unzco.com/basicguide.

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

Consider your product as well. Will your U.S. designed productfit an international lifestyle or needs? Clothing sizes aredifferent—both in how they are numbered and what the sizes mean. Awoman’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 onthe metric system.27

There are several ways you can export. One is to use onlineservices such as eBay. Approximately one-fifth of eBay’s sales areout of country.28 If you’re handling your international businessthis way, a lot of the rest of this section isn’t really for youuntil you want or need to change methods. Another is to work frompersonal contacts gained through school, travel, or family. Mostexporting small businesses start with countries where they have hadpersonal experience or support.29 These two methods are calleddirect exporting, since you are selling directly to foreign buyersor distributors.

If you want to use outside experts, there are threeintermediaries who can help. With indirect exporting, you useagents, export management companies, or export trading companies asinter- mediaries to handle most of the exporting process. Directexporters can also get help from freight forwarders. Freightforwarders are specialists in export-related activities includingtariff sched- ules, shipping, insurance, packing, transportationarrangements, customs clearing, and other export details. (By theway, many agents, export management companies, export tradingcompanies, and freight forwarders are themselves small businesses.They know exactly what problems you’ve faced and are much easier toapproach than some megacompany.) The Small BusinessAdministration’s Export Assistance Center can help you findone.

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

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

TABLE 11.1   Sources of Export Assistanc Question 3:Whom do we contact over there? You may already have internationalcontacts through school, friends, travel, or other methods. If so,you’re ahead of the game. Even if they cannot help you withspecific questions, they probably know someone who can. On theother hand, if you do not have any contacts, a lot of thegovernment services you have already used can provide lists ofpoten- tial intermediaries or end users. In addition to the freeservices 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, whichwill identify up to five potential businesses to work with you aslicensees, agents, distributors, or strategic partners, andprequalify them based on your criteria. The government’swww.export.gov site offers a database of sales leads that can besearched for free by industry, region, or country. They also arethe point of contact for catalog exhi- bitions which can get yourproduct or service catalogs into the hands of potential buyers inspecific markets (or at specific trade shows) overseas.

Other good ways to make international contacts are toparticipate in trade shows and trade mis- sions. In a trademission, a U.S. government official takes a small group of businessowners to dif- ferent foreign countries in order to help establishrelationships and promote exporting. There are not a lot of thesemissions, and they are usually specific to a particular type ofbusiness and region of the world, so they are not alwaysappropriate. At an international trade fair, similar to domestictrade fairs, you have a booth displaying your products or servicesand the opportunity for exposure to thousands of potential clients.Again, some fairs are industry-specific, while others are moregeneral. The U.S. government often has a U.S. pavilion featuringexport-oriented companies. These companies often have theopportunity to tie into other U.S. government services such asmeeting with local U.S. embassy officials, prearranged meetingswith qualified customers, market research information, tradebarrier information, transportation and customs information, andassistance and access to U.S. trade show experts. Even if you can’texhibit in the fair, attending the fair may give you a chance tomeet the sort of people you need to know.

The U.S. government through www.export.gov also provides suchservices as printed and video catalogs, online databases, andpersonalized (fee-based) contact services. The U.S. CommercialService will also assist a company in arranging private promotionalactivities, including exhibitions, press releases, and receptionswhen appropriate.

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

The next step is to export your products. But there are a fewother things to consider first. Pricing becomes complicated as youneed to cover transportation, the additional documents you mayneed,

possible tariffs (taxes on incoming goods), potential currencyvaluation changes, the cost of convert- ing currencies, and theadditional packaging necessary to ship abroad. The importer usuallycovers foreign taxes, tariffs, additional shipping charges, porthandling fees, and the like, but this must be carefully spelled outin your contracts in order to avoid potential differences ofopinion.

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

There are a variety of payment procedures available. The easiestfor you is to require up-front cash payment prior to shipment (orcredit card if appropriate). This eliminates your risk, but putsthe customer at risk. Providing credit to your customers reversesthe risk, and puts it all on you. Both of these are possiblemethods of receiving payments, but less often used. More typicalmeth- ods include letters of credit or documentary drafts. In bothcases, the payment procedure now includes four parties—you, yourcustomer, and both of your banks—and payments are made upon properpresentation of certain documents, including the letter of creditor draft, bills of lading, and other paperwork. Although the systemis somewhat complex, it provides a lower level of risk for allparties than cash in advance or an open account. You can findassistance about these methods at your current bank.

Financing and insurance become important because of the lengthof time it may take for interna- tional payments to be processedand the risk of default, as well as the difficulty of recovery incase of default in international transactions. The Small BusinessAdministration (www.sba.gov), the Ex-Im Bank (www.exim.gov), andthe Overseas Private Investment Corporation (www.opic.gov) provideloans and insurance to cover exporting. In some cases, these loansmay also be used to finance trade show participation, to translatebrochures and catalogs for international distribution, to renovateor expand existing facilities necessary to produce products forexport, to set up lines of credit for potential customers, toprovide export working capital, and to provide funding fordeveloping an export program.

Last is the consideration of conflict resolution. Although thepossibility exists for pirating, prod- uct misuse, and otherunfortunate occurrences, the primary areas for conflict resolutioninclude nonpayment and contract default issues. There is nouniversal court of law that can handle these situations. The U.S.Department of Commerce can provide advice and offer reputable localcoun- sel, but only for sizable losses, typically several thousanddollars or more. The U.S. Council of the International Chamber ofCommerce (www.iccwbo.org) provides international arbitrationservices and offers some other suggestions, but arbitration, too,is costly and probably not worthwhile un- less the loss issignificant. This difficulty in international dispute resolutionunderscores the need to carefully select partners and to do athorough job of prescreening. This is an area in which variousgovernment agencies can help you. The U.S. Commerce Department, forexample, prequalifies potential customers in many cases prior torecommending them; you should check the particular programspecifics to verify. Ex-Im Bank provides credit information onpotential customers and, as mentioned earlier, many agenciesprovide insurance for export payments.

Importing

Importing strategy is similar to exporting, but with the buyersand sellers reversed. Instead of cus- tomers to buy your products,you are looking for sources to sell products to you (which, ofcourse, you’ll eventually resell). If you have the opportunity totravel abroad, look for products that are selling well in thecountry you’re visiting and aren’t available in the United Statesor products that are considerably cheaper than similar ones foundin the United States (labor and manufacturing costs are oftencheaper in other countries than the United States). Trade missionand domestic and international trade shows are also good sources.If you can’t travel, ask your international contacts for thisinformation. Next, find out who manufactures them and write themanufacturer a letter, introducing yourself and your company andthe potential you see in your market for its product. You’reselling yourself, so be sure to tell the producer why you are thebest person or company to be representing the product (i.e.,experience in that product or in importing, contacts anddistribution systems already in place, familiarity with the market,etc.). International mail can be painfully slow, so a fax or e-mailletter is probably best. Also, avoid slang terms (e.g. “yourproduct is da bomb!”) and idiomatic expressions (like “break theice”) that are likely to be misunderstood. Since English is rapidlybecoming the language of business, a translation is usually notnecessary. Follow up with a phone call or visit in which you canpitch the specifics of your marketing plan for the product.32 Oneway to conduct international calls for free is to register forSkype, an Internet service which lets you use a broadband connectedcomputer to call other Skype users for free (www.skype.com). If youand the overseas company both use Skype, having long conversationsto get an understanding of each other will not pose a financialproblem. Along the same lines, it is worthwhile these days to checkto find out whether an overseas company has video capabilities.Video cameras for PCs are inexpensive, and videoconferencingservices are often available on campuses or at commercial locationssuch as FedEx Kinko’s for low costs.

With importing, many of the paperwork and insurance details willbe your source’s responsibil- ity. Import buying works the same wayas export selling, that is, the same sorts of paperwork andprocedures 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 tocultural differences. You’re likely to make some mistakes, but taketime to learn at least the basics about the culture you’re dealingwith to avoid the biggest errors. Travel guides and U.S. governmentcountry reports often offer brief cultural assistance as do bookssuch as Kiss, Bow or Shake Hands and a plethora of “doing businessin ———” guides.33

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

Location

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

The first choice, and often only choice, for many entrepreneursis their hometown because it offers convenience and a familiarsetting, and it eliminates a lot of possible family issues. Theremay also be valid business reasons for this choice: The localbanker knows you and is more likely to loan you money; you knowyour market—the potential customers in the area—and understandtheir wants and needs; you have seen an unmet need that you canfill; and, for many entrepreneurs, friends and family (usuallylocal) are often the first customers and are great at spreading theword about your business. (Remember that word-of-mouth is often thefirst method of getting to your customers.)

There may also be some compelling reasons to consider adifferent location. What are the busi- ness laws like in your area?Local zoning ordinances specify what sorts of businesses areallowed and not allowed in specific locations.34 Certain types ofbusinesses—usually those deemed hazard- ous or that produce foulodors—may be banned or severely restricted. State and localpollution standards, worker’s compensation, wage rates, and othersuch legislation might increase the cost of doing business to thepoint that other locations become much more favorable. State andlocal 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 newbusinesses ranging from tax credits to low-interest loans, fromfavorable business laws to business incubators (discussed later).Most of this information can be found on the Internet. Try thestate or city business development office (a good place to start isthe 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 atwww.uschamber.com/chambers/directory/default to find your localChamber affiliate). There is also information by state availablefor your state at business.USA.gov, and the Small Business Ad-ministration offers links to state-based resources atwww.sba.gov/category/navigation-structure/ counseling-training.Site Selection Magazine’s website (www.siteselection.com) has anumber of tools that can help you find the right location. Many ofthese require being a registered user, but registration isfree.

Other reasons to consider other locations are tied to yourcustomer. Your hometown may not be the best place for you to findyour target market customers. Are you close to the people who willuse your product or service? Other considerations includepopulation growth or decline (especially in your target sector),income levels, and predicted increases or decreases in income. Isthe location expanding economically or slowly dying? Perhaps thebest source for this infor- mation is the US Census Bureau. Stateand local municipality business development offices may also carrysuch information, but they are likely to be slanted towardattracting new businesses. Being positioned to benefit yourcustomer can also be key. Zappos’s primary distribution hub wasplaced in Louisville, Kentucky, to be close to a major UPS aircargo hub in order to speed delivery.

Also consider the type of business you are planning. Do you needskilled labor? If so, what areas will provide you with thenecessary employees? Do you need to be near raw materials orparticular methods of transportation? These issues will helpdetermine your choices. Where are your competitors? Certainindustries tend to be clustered in certain regions where they canmake efficient use of services and employees. Think of California’sSilicon 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 acrossthe country—can be very expensive. It pays to plan ahead.

Service Firms

There are three typical locations for services: at the client’slocation, at a mutually accessible loca- tion, and at your firm’slocation. Traditionally, services may have been tied to one oranother of these, but marketing niches have been carved out bypeople daring to be different. Typically, dry cleaning andrestaurant dining are services provided at a place accessible toboth parties, but some dry cleaners now offer pick up and deliveryfrom the client’s home, and not only pizza restaurants offerdelivery these days. Thanks to the Internet, video rental likeNetflix.com and other services are handled electronically, and thecustomer and service provider may never meet face to face. Whateverinnovative niche you select, there are a few things to keep inmind.

At the Client’s Location

Typically, these services include things such as house or officecleaning, pest control, remodeling, lawn and gardening services,carpet cleaning, and similar services which must be performed atthe client’s location. Business headquarters can be a home officewith enough room to store and maintain any necessary equipment usedin the service. Reliable transportation, preferably modified toorganize and store tools efficiently, is imperative. Moreimportantly, the range of your client’s locations must be plannedto prevent transportation times from being unmanageable. Forexample, facing a one-hour drive to a client’s location might meanyou have tied up two hours in commuting. If you cannot charge fortravel and do not have other clients nearby, it means you have twohours in which you cannot make any money that day.

If you’ve done your homework carefully, you already know thegeographic area(s) most likely to use your service. Certainservices may be organized into a rotating schedule. For example, ahouse cleaning service may clean a certain set of neighborhoods onMonday, different set on Tuesday, and so on. In other cases, moreremote clients may be charged a transportation fee. In some cases,a mile- age fee may be appropriate for your business (deliveryservices, for example).

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

Mutually Accessible Location

Services using this approach often have too much specializedequipment to be readily transported and a need for at least someclient involvement. Barbershops, dentist offices, video rentalstores, and restaurants are services typically located at a sitethat is extremely convenient for the client and reasonably so forthe owner and employees.

Even though your service may be traditionally located in amutually accessible area, consider what you might do to make ithome-based (see Chapter 5). Your watch repair shop might generateclientele by being located in a shopping center, but will the addedsales be offset by the high cost of rent, utilities, insurance, andother payments? Can you offer pickup and delivery and do the workat

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

Remote Location

In this type of service, face-to-face meetings with the clientare infrequent. Typical services that meet this criterion includemedical transcription, data processing, fulfillment centers, andsome consulting work. These services generally are ideal forhome-based businesses. Certain services, for example, fulfillmentcenters, generally take more space—at the minimum, an attic,garage, or basement. The biggest advantage of these sorts ofbusinesses is that they can be located anywhere in the world. U.S.hospitals, for example, use medical transcription services locatedin 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 aco-owner, who is a cousin and long-time friend of one of the twoAmerican owners (www.tsviinc.com).35 Other than perhaps someinitial 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 areyour considerations about location now? Where you make the productis really dependent on the product. Some products that do notrequire a lot of specialized or bulky equipment can be produced athome unless zoning ordinances forbid it. In addition to whateveroffice space is needed, adequate work space is also required. Thebasement, a garage, or a home workshop may be adequate for sometime. As business expands and as you add employees, it will becomeawkward if not illegal to continue production at home (see Chapter5).

Some products require bulky and specialized equipment, utilitydemands atypical of homes, or sizable warehousing requirements andare never suitable for home businesses. Certain productioncharacteristics—for example, use of hazardous materials andmaterials with strong odors or noisy operations—may make ahome-based business undesirable. Many cities have zoning ordinancesprohibiting manufacturing in residential areas. When you start tohire employees, providing the amenities they will expect or thatare required by law will usually require moving the business fromyour home.

Contract manufacturing might be a better option, at least forawhile. In this case, a firm with the capabilities to produce yourproduct is contracted to manufacture it for you, usually for a flatper unit fee and a possible setup charge. Some firms will alsoassist in marketing and sales as well. Trade magazines in yourfield often list ads for contract manufacturers. An interestingpossibility here is to use sheltered workshops to perform lightmanufacturing or assembly sorts of businesses. These workshopsexist 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. Whatyou should look for falls into three main categories: home-basedbusinesses (covered in Chapter 5), high customer contact (e.g.,retail), and low customer contact (e.g., manufacturing). Each hascertain criteria to be considered.

High Customer Contact Businesses

Businesses with high customer contact include such diverseoperations as medical or legal offices, restaurants, retailestablishments, dry cleaners, and other businesses that are highlydependent on being convenient to the customer. For theseoperations, 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 targetmarket and to enough of the customers to make you profitable. Ifyou are considering a franchise, many will offer site criteria tohelp you make your selection. If you are going it alone, considerthe population density of the area and how many of the people inthe area meet your target market criteria. The U.S. Census Bureauwebsite

and a number of free nongovernment sites like www.zipwho.com andwww.city-data.com can be a good starting place for freeinformation. See Skill Module 11.2 and the Online Learning Center.If plowing through the Census Bureau website doesn’t get you whatyou want, several commercial services mentioned in Chapter 10including Prizm and ESRI will sell you data about the population ina particular zip code for several hundred dollars. More detailedand specific commercial infor- mation is also available and canrange in price from several thousand dollars to over $100,000 andis probably not an option for most entrepreneurs.37 Again, thewebsite 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 thearea. These are other busi- nesses that draw customers to the areaand 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 thetype of customer you are seeking and the likelihood of thesebusinesses in attracting them. If you want a teen customer, alocation near a high school works well. If you are looking forevening clientele, offices that close at five aren’t the righttraffic genera- tors for you. Drive around likely areas and locatepossible sites. Visit during the hours you anticipate to be peaktimes for your business and evaluate foot and car traffic.38 Lookat the crowds or lines in similar businesses and decide whetherthere is room for you. If most businesses seem empty, you probablywill be too.

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

Parking is also an issue. Is it conveniently located to yourplace of business? Do customers need to cross busy streets to getto you? Is parking free or paid? Are parking areas well lit andsafe? Are there wheelchair ramps or other accommodations fordisabled customers?

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

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

Another instance when you want to be near competitors is whenyour business provides a strong contrast to the competition in thearea. Do you offer better assistance, additional services, uniqueadvantages, 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 youoffer that differentiates you.

Low Customer Contact Businesses

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

Some major metropolitan areas offer empowerment zones. Thesezones, often in economically depressed areas, offer businesseslow-cost space and tax advantages for locating there. For moreinformation, see www.rurdev.usda.gov/BCP-EZEC-Home.html orwww.siteselection.com.

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

General Comments on Site Selection

How do you go about finding potential sites? Looking for “forsale” and “for rent” signs is a start, but not all space will beadvertised that way. Just as a good real estate agent can warn youabout the pro- posed freeway project going through the backyard ofthe house you are considering or let you know about houses not yetlisted but likely to be, an experienced real estate broker willalso be able to assist you in your search for your businesslocation. Many have relationships with landlords that can work toyour benefit. They are also likely to have at least some of themarket statistics you may need to help you decide if the locationis right for your business.43 Level with them about what you canspend. You have your business plan and know the cost per squarefoot you can afford and be profitable. If you are looking atproperty more expensive than that, you’ll need to cut cornerselsewhere.44

Leasing

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

In reality, most landlords (especially those from big nationalcommercial real estate and mall companies) have fairly standardcontracts which they don’t like to change. These typically startout as very pro-landlord. That said, in many cases they are alsolikely to accept certain standard clauses that are moretenant-friendly. However, it is unlikely they will offer those. Youwill need to ask for them. In this section you will learn about themajor types of tenant-friendly clauses you might want to seek.However, it makes tremendous sense to get a real estate lawyerinvolved to help you. They should be able to tell you what kinds ofclauses are typical, and who else offers them in your area, and ifthere are any other likely traps in the lease. You can learn how tochoose 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’sclassified ads for commercial real estate. If you know of a greatloca- tion, but there is no “for rent” or “for lease” on it,consider asking the owner or current renter about subleasing aportion of the location. If your product or service complements thecurrent tenant, you could find a home. Local real estate websitesmay also have listings, and there are national websites likeLoopNet.com which compile listings from a variety of sources. Thereis a how-to video for

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

It helps to have two or three possibilities identified beforeyou begin negotiating leases. This is a use of the idea of thepower of rivalry from Chapter 7. This gives you a basis forcomparison, and an alternative for leasing when negotiating. Butnote that the more alike the properties, the greater your power atthe negotiating table. Also, if you are opening a franchisedoperation, you will want to contact your franchisor before youstart looking for locations. Most franchisors have specificationsfor locations, and advice on costs and other features. They oftenhave a lease review department to help you with this process.45

The best way to start thinking about the clauses is to separatethem into those clauses related to choosing a property, day-to-dayoperations, and endings. In reality, though, all of these clauseswill get negotiated when you and the landlord discuss the leaseagreement.

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

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

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

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

agreement on the signs and, if possible, a clause that saysapproval 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 “leaseholdimprovements,” which are permanent changes made to the loca- tionto fit your business’s needs. You cover these by seeking a “tenantimprovement allowance” or “construction allowance” which are rentdollars (typically $5 to $25 a square foot) they agree to let youput into improving your location.47 This amount should be based ona firm estimate from a construction profes- sional. Anotherconcession is a “rent-free use period” which cov- ers the timewhile 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. Theseinclude:

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

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

too exact a description could prevent you from expanding theproducts or services you offer. Try to add the clause “and relatedgoods and services” to any description you give to providereasonable flexibility.

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

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

?          Rentdefault: When you are late paying rent, all sorts of penalties andproblems emerge. It also hurts your credit rating. Some leasesrequire the renter to keep track. Ask to change the lease tospecify the landlord needs to alert you immediately on the rent duedate in written or telephonic (usually fax) form, and get the 5–10day default period for paying rent before default starts from thatnotice.

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

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

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

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

Realize there can be problems you face caused by the propertyitself. 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 ordiscount store. Part of what you are paying a premium for is thetraffic and reputation these anchor stores bring. What if theyleave? Your location’s quality could dramatically drop. To get outof your lease under these unfortunate circumstances, you want toask for a cotenancy clause.

Although we’ve segmented a renter’s concerns by stage of theleasing process, all of these issues need to be negotiated at thestart when crafting a lease. Although landlords often start with alease they call “standard,” nearly everything about it can benegotiated. But be fair; the space may mean a lot to you, but it isa drop in the bucket to large commercial realtors. You can learnmore about negotiating in general in Chapter 18, but there are somespecial considerations for lease negotia- tions. Because so manyaspects are potentially negotiable and areas have different normsfor what are typical tenant-friendly clauses, work with a realestate lawyer of your own to help you in the negotiation andphrasing of the lease terms.

Layout

Since so much of this is particular to the type of business youare in, what you’ll read below is a general guide. Check outcompetitors or similar types of businesses to see what you like anddon’t like, what seems to work well, and what seems to cause a lotof problems. In addition, certain categories—restaurants andretailing, for example—have numerous books from college textbooksto do-it-yourself books, like the “For Dummies” series. Try yourlocal library or bookstore.

The layout of a potential site must be considered carefully. Isthe building setup appropriate for your use? A restaurant will havedifferent needs than a retail area or a manufacturing plant. Theamount of area allocated to the “front room” (e.g., eating orretail areas) versus “back room” (storage, kitchen, warehouse, andoffice areas) needs to be adequate for the purpose of yourbusiness. If you are operating a restaurant or retail operation,how important is space in the front room? A coffee shop orfast-food restaurant squeezes in more customers per square footthan a gourmet restaurant. Do you need specialized areas, such as akitchen or laboratory that are expensive to retrofit into existingbuildings? Is there adequate storage area? How much dock space isappropriate for your business? A manufacturing firm usually needsmore dock space and storage than a retailer or a restaurant, whilea service company may need very little of either. Retail operationsneed display windows, while manufacturers do not. For restaurantsor other services, this need varies. Is there room for expansionshould the business grow? Remember: Moving can be expensive. A goodstrategy is to rough out the desired layout of your operation ongraph paper to get a basic idea of the square footage needed andhow it should look. What exactly you want may not be out there, butyou’ll be able to see what’s close and what’s impos- sible to livewith.

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

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

Once the building has been selected, how you lay out theinterior also needs to be considered. While retailers, restaurants,offices, and manufacturers all have different layout needs andconsider- ations, two facts hold true: (1) layouts need to bedesigned so as to eliminate unnecessary and exces- sive employeemovement, and (2) the layout says something about who you are toyour customers, employees, and visitors. In retailing, this lastfactor is called atmospherics. While the opportunities forvariation are limitless, let’s consider the major types of retailand manufacturing layouts as well as what atmospherics might meanto a business.

Traditionally, manufacturing processes are laid out in one oftwo formats: production line layout and process layout displayed inFigure 11.2. In the production line layout, material flows in onone side of the operation and continues to the other end of theoperation. Most assembly manufacturing is done this way, often withconveyors moving subassemblies from one station to another.Although a rather rigid flow, it works well for mass production andhigh-volume manufacturing. The second method, process layout,groups similar machines/or functions together, not unlike a typicalmachine shop. This format is much more appropriate forlower-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, hasaisles running from the front of the store to the back like thetypical grocery, discount, or convenience store. It’s a veryefficient and organized layout although it lacks some visualimpact. The second layout, the free-form layout, alleviates thisproblem. In this layout, the store is laid out in sections withaisles that angle or meander through the store. This is the layoutmore typically found in upscale department stores, clothing stores,and the like.

Atmospherics include all the ambiance items that might beconsidered in your business. An up- scale women’s clothing store islikely to have wider aisles, deep carpeting, soft “elevator music,”indirect lighting, and, perhaps, a lightly perfumed aroma. Theseare appropriate atmospherics for the target market. A shop cateringto edgy teen fashions may be done in black and chrome with loudrock or alternative music and strobe or black lights. Both of thesesend a message about whom the store is likely to appeal to.Restaurants use atmospherics, too. Compare a family restaurant to agourmet restaurant to an ethnic restaurant. Services and the officeand public areas of manufacturing firms do this as well in theirchoice 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 theperfect layout in the perfect location and the street appeal of anew build- ing, but it is costly and slow. Buying something alreadyin existence shortens the time and may be

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

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

The issues of location and distribution are decisions thatbusiness owners make only occasion- ally. Many businesses operatefrom the same location for their entire existence. Distributiondeci- sions may come up more often. For example, a business startedon eBay develops its own website, and then grows into a store inthe city’s commercial center. Regardless of how often thesedecisions are made, they are central to the success of the smallbusiness, because placing a business in the right location andequipping it with the right channels of distribution are essentialto finding and connecting with customers. Done right, managing theissues of location and distribution can turn an average firm into amajor success.

1. According to this chapter, what are three keyconsiderations in determining the location of yourbusiness?

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

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