Accelerator: Take charge - First premises

Now that you're in business, you'll need a decent workplace fast. What are the key considerations? Alexander Garrett helps you through one of the biggest decisions that a new entrepreneur faces.

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Last Updated: 31 Aug 2010

For Bill Hewlett and Dave Packard, it all started in a garage in Palo Alto (now California Historic Landmark No. 976). For Anita Roddick, the Body Shop began with her mixing ingredients on the kitchen table. And in 1903 William S Harley and Arthur Davidson built their first bike in a 10ft by 15ft wooden shed. For all serious entrepreneurs, though, there has to come a time when such makeshift homes are outgrown and you start looking for your first commercial premises.

'For most companies, property is the second-highest overhead, after staff; in a smaller company it can be the highest,' says Ian McRae of Northampton-based commercial property surveyors Chadwick McRae. 'But people do not treat it with the respect it deserves, and in doing so they expose themselves to all sorts of liabilities.'

Perhaps the first step you need to take before you move anywhere is to decide whether you're going to rent or buy. Not many start-ups buy a property; as McRae points out, you are committing yourself to a long-term mortgage at a time of great uncertainty, and anything suitable for your needs now probably won't be in 12 months' time. Commercial property can be a great investment, but now is probably not the time to do it.

That leaves a choice between a long-term lease and serviced accommodation. It's often a question of balancing cost against flexibility: with serviced offices, all your outgoings - rent, business rates, utility bills, repairs and furnishing - are generally wrapped up into a monthly charge, but there is a premium to pay, which is the landlord's profit. The advantage is that you can typically take a licence of 12 months or even less with just a month's notice required, and move to a bigger or smaller unit as and when you need to.

With a conventional leasehold, on the other hand, the main benefits are lower outgoings and the opportunity to fit out the property in line with your needs.

Says Philip Marsh, director of Thames Valley-based surveyors Philip Marsh Collins Deung: 'If you're a 10-person business, you probably shouldn't be in a serviced office; that may be true even with five people. As you get bigger, so does the landlord's profit margin.'

Finding the right home for your business is not the same as choosing a place to live. If residential property is all about location, location, location, with commercial property a more subtle mix of factors comes into play: location, specification, negotiation. If you're a retailer, clearly the first of these is key; you'll probably want to find a spot on the high street with optimal footfall from your target market. But if yours is an office-based business, or your requirement is for light industrial or warehouse accommodation, location is far less critical.

'If your business is genuinely portable, then the choice of location is often driven by the type of commute the owner wants to get involved with,' says Marsh. 'There are certain types of business where it helps to be somewhere in close proximity to others in the same industry - historically, newspapers and financial services were examples of that. One reason may be that it's important to be in regular informal contact with others in the business. And location can also play an important part in your image for customers and clients. If you're running a high-value service company, you won't want to be on the second floor of an industrial unit.'

When considering any location, think about the availability of suitably skilled staff at close hand - another reason for choosing an area where a cluster already exists.

So where should you look? Local newspapers and estate agents' windows are one option, but increasingly it is possible to track down the perfect property online. The most comprehensive website by far is the Estate Gazette's www.egpropertylink.com.

Your local authority - or local development agency - will usually have a list of available properties; and if you want to save yourself the time and bother of looking, a commercial surveyor will do it all for you.

This is where specification comes in. You need to have a clear idea of what your requirements are, in terms of size, facilities, infrastructure and planning consents. Size is a difficult issue for any growing business. As a ready reckoner, you need about 70 sq ft per person in a call centre, and 130-140 sq ft in a regular office environment. But the trick is forecasting how many people you'll need to accommodate in one, two, or three years' time. And you may also need room for meetings and other purposes. Business parks and industrial estates often have the advantage that they can provide room to expand when you need it.

With industrial or warehousing operations, the property clearly has to be fit for purpose; and it's vital you don't overlook small details - for example, the availability of a broadband connection.

The building itself also needs to be considered carefully. Does it offer the right access, particularly for any machinery or equipment? What about disabled access? Does it have adequate parking? And what is the state of repair? 'We would always fill in a detailed Schedule of Repair, looking at as many as 100 different items,' says McRae. 'I look at the entry strategy, but also at the exit strategy, and the last thing you want when you eventually leave is to be hit with a massive Schedule of Dilapidations.' This is a list of what a landlord will ask the tenant to put right before leaving the property, and it is a frequent cause of legal disputes.

And so to the thorny business of the lease itself and its negotiation. Commercial property is an eclectic business with a language all its own: alienation, amortisation, assignation just for starters. 'Landlords are professionals, so the rank amateur will always be at a disadvantage dealing with them,' McRae points out. 'Businesses almost invariably neglect to market themselves to landlords. The landlord's only concern is that he'll get the rent, so if you can show that you are a sound bet, with references, business plans, accounts, bankers, solicitors and so on, they are far more likely to negotiate a lease on equable terms.'

Commercial rents cover a broad spectrum, from as little as £10 per square foot per annum outside the south-east to £100 psf in London's West End.

Says Marsh: 'You can sometimes get money off by negotiation, but it is often better to get the other terms right. For example, getting break clauses inserted at a point that suits you gives you real flexibility and can be far more valuable than a few pounds off.'

Don't be gulled into taking a long lease without breaks; since the late 1980s, typical lease periods have come down from 20 years or more to an average of 6.4 years today. A common commercial lease is for 10 years with a break clause after five. If you're looking for a new design-and-build facility, you may have to take a 15-year lease with a 10-year break, simply to reduce the risk to the developer. For industrial businesses, longer leases can be more appealing, both because moving plant and machinery can be extremely costly, and because the capital outlay for fitting out can be written down over a longer period.

In a world where, increasingly, everyone thinks they're an expert at buying and selling houses, it's easy to think that finding business premises will be a piece of cake. But commercial property can be a minefield for the unwary, and if you sign on the dotted line in haste, you will have the opportunity to repent at leisure.

GlASSES DIRECT - NOT SO MUCH A LONG-TERM VISION AS MOVING WHEN THE NEED ARISES

James Murray Wells set up Glasses Direct in 2004 at the tender age of 20, when he was still a student at Bristol University. Appalled by the price-tag for a pair of glasses, he discovered that they could be sold for a fraction of the usual retail price, and had the idea of setting up his own cut-price spectacles business selling over the internet. The business began with a few friends working from his parents' living room in Malmesbury, Wiltshire. 'My mum and dad were providing the staff canteen, and at one stage we booted my sister out of her bedroom so we could put in another computer. At that point my mother said "Out!",' recalls Murray Wells.

As a dot.com, he could have relocated anywhere, but eventually decided on a barn in a nearby small business park. 'My biggest concern was that we needed to be wired up and running straight away. With 7,000 unique visitors a day to our website, we couldn't afford any downtime,' he says. After viewing the building, he convinced BT to keep the existing connections there open, and moved in the following day.

Glasses Direct signed a lease for one year. 'It was the biggest contract we'd signed at that point, and it was a bit daunting because it wasn't clear that the business would be a runner - I had the fallback of going back to my law course at Bristol.'

Within a year - and with 25 people on the payroll - the firm moved to a bigger barn in the same development, this time on a three-year lease. The plus points of the current premises, says Murray Wells, include the fact that with its big windows and Cotswold stone, it's a place that people like to work. 'There's definitely a creative atmosphere in a building like this.'

And commercial rents are relatively low in this part of the world. 'I reckon we're paying around a fifth of what we'd pay to be in a decent part of London,' he adds. Now with a staff of 35, Glasses Direct is about to open its first warehouse in Gloucestershire.

'We're bursting at the seams in this building now,' says Murray Wells. 'I guess we'll have to hold some loud parties, so that our neighbours move out.'

www.glassesdirect.co.uk

FRESH ERIC'S CAKES - READY-MADE PREMISES CAME WITH THE TAKEOVER

When Eric and Jeanette Watkins set up Fresh Eric's Cakes at the tail end of 2003, it was the classic kitchen-table business. Eric had taken voluntary redundancy from Pfizer, and with Jeanette's experience in catering in the US, they were looking to establish a business that would be more conducive to spending time with their newborn first child. They felt that the quality of many cakes in the UK was disappointing, and set out to develop richer, American-style cakes with quality ingredients.

The Watkins started up in the kitchen of their Victorian terraced house in Rochester. 'For the first three months, we were baking two cakes at a time, which we were selling to our local high street cafe, while we developed recipes and found out what worked,' says Eric. 'When we were asked for 10 cakes one bank holiday, we panicked.'

Their cakes were soon picked up by a local franchise with 15 cafes and, with the baby starting to crawl, Eric and Jeanette decided they needed to find proper premises. 'We took the first thing that came along, which was a 300 sq ft shop in the high street, as we were in a desperate hurry and didn't have lots of money,' recalls Eric. The premises had consent for catering, however, having previously been run as a cafe, but Eric and Jeanette decided they didn't want to be retailers and discouraged customers from coming in. The lease was for only two years, but they had to spend £5,000 on equipment and fitting out to meet food safety requirements, including new floors, walls and a bathroom.

Within two years staff numbers were up to six, and they were supplying the likes of Selfridges, Fortnum & Mason and Fresh & Wild. They were ready to move on again. 'We had the choice of taking an industrial unit, which we would have to equip from scratch - I estimated that would cost us around £200,000 - or buying an existing business as a going concern,' says Eric.

They chose the latter option. The company they took over had a fully equipped 1,200 sq ft unit and its own customer base. 'If you are in manufacturing, with high capital costs, I would certainly recommend considering taking over a going concern,' says Eric. 'You get ready-made premises and ready cashflow, so you don't have to wait six months for a return.'

www.freshericscakes.co.uk.

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