Added by on 2012-09-26

Your business location can be important, particularly for a service/retailer. Initially, you may have started your company by leasing the cheapest premises available but now you have grown and want larger or better facilities, somewhere which will increase your business. Potentially you can now go to the ‘next level’.

However, it is important that you undertake this decision carefully. Before deciding to relocate, ask yourself these questions:

Can your business afford it? Will relocating increase or decrease the costs of your fixed overheads?

If relocating increases fixed overheads, will the move give you a corresponding increase in profit? Can you forecast what the expected return will be?

Will the business be better off if you purchase new premises instead of leasing?

If leasing, will the new premises offer better facilities and location?

Will your customer base follow you to the new location? Can you increase your customer base by relocating?

Location, Location

Whether location is important to you depends on the nature of your business.

Obviously, as a retail/service business, location does still play a part in any decision.
Industries such as restaurants or hairdressing still need to attract passing trade.

What may have suited you initially (due to cost or size) may now not be suitable. Choose the best value for money option that gives you the location and facilities you need. Things you need to consider include:

  • Traffic past the door
  • Parking facilities
  • Transport availability and access
  • Other services available.

For most businesses, location and appearance is important. For example, retail/service businesses traditionally look for premises with a heavy traffic of people walking or driving past. The assumption is that customers will walk in off the street.

This means that High Street positions in capital cities are much sought after and consequently expensive.

High Street locations may even be counterproductive for some businesses. Parking is often difficult, delivery of supplies and products may be troublesome, and even the pavement may get congested. Staff may have to commute to work using rush hour public transport and travel long distances each day.

While visibility is important for retail/service businesses, this may be achieved in other, less expensive, ways.

Premises located in suburbs some distance from the Central Business District (CBD) are often cheaper and offer better facilities than those in the CBD. Parking and loading/unloading may be easier, communication facilities may be comparable and rent and rates lower.

You should analyse your business and establish what are the key location factors. For example, a coffee lounge needs high visibility and ‘foot traffic’ whereas commercial printer may choose to work in an industrial area. Consider the priority you place on location (taking into account all relevant factors) and choose the premises that best suit your needs.

Own or lease your businses premises?

When businesses are first started, most premises are leased.

This is because purchasing your own premises may be cost prohibitive whereas landlords are responsible for building insurance and body corporate fees in strata buildings, and may be willing to carry out improvements and upgrades in return for rent increases.

As you are aware, ownership of your premises generally ties up capital which may be better invested elsewhere in the business.

Also, as your circumstances (and save requirements) may change quickly, sometimes renting a property makes more sense.

However if you are keen to buy as your business matures and when sufficient capital is available, the increased security of owning your own property and the ability to make changes without needing the permission of a landlord, can be worthwhile. You may be entering a phase now where you are considering buying your own premises.

How should you make the purchase?

Most businesses purchase property in their own name. The business owns the asset and is able to take any corresponding tax deductions. This is the common and ‘traditional’ approach of most businesses.

The alternative is ownership of premises by the business owner through a self-managed superannuation fund.

This is particularly appealing to people who have built up a large amount of superannuation. You may have used superannuation to minimise your tax during paid employment and or say, taken early retirement to set-up your own business. Building ownership may fulfil the “fixed interest” (stability) component of a balanced investment strategy for a superannuation fund.

If considering this ownership option, it is wise to seek advice from an accountant or financial planner. There are some taxation and legal issues that must be addressed.

Superannuation funds must confer no current benefit on the future beneficiaries or they may lose their favourable tax status.

This table summarises the relative advantages of leasing and buying.

LeasingBuying
No capital required.In times of inflation, real estate is a good investment. Rising rents become an asset rather than a danger to the owner.
If the business is terminated, the tenant can sublet, so the financial loss is minimised.Any improvements to the premises become the owner’s property, and add to the value of the owner’s investment.
The tenant is not responsible for property tax, fire insurance, maintenance and repairs.Mortgage loans may be used to finance the purchase, so that the actual monthly cash needed from the business may not be that much greater than a lease.
If the premises become unsuitable, they can be abandoned on expiry of the lease, with no further commitment.An owner may deduct capital costs on the building as well as maintenance and repair expenses.

Consider your options carefully. As the business grows or becomes more stable, it is often the choice of the business owner to build an asset base.

This usually includes commercial property, such as the business premises. Whether it is also the premises from which you operate is another question. Typically, a service/retailer may need more flexibility than a company which is strictly a service provider, as a service provider can operate from a variety of premises, including home.

Leave a Reply

Your email address will not be published. Required fields are marked *

*