Understand the trade-offs of construction, expansion and relocation.
Many business clients approach me and say, “we need more space.” Growth is generally a good thing and the prospect of expansion is exciting, but it’s a complex decision-making process that requires plenty of analysis.
Business owners are experts in running their companies and driving strategic decisions for the future; however, managing a construction or space utilization project typically happens only once or twice in their career. That’s where understanding the process is critical, and why I am planning a series of articles about successful business expansions I’ve seen while working with owners who have gone through it. Over the next few months, I’ll examine different topics like the decision-making process, financial analysis and municipality resources, and share stories of local businesses and their successful expansions.
Build, expand or move?
At the outset of considering whether to build new, expand or move to a new site, business owners should understand the factors and the outcomes of different decisions.
The need: What is driving the need? Is it a short-term issue led by one dominant customer, a projection of consistent future growth or something structural like inadequate ceiling heights? What are the assumptions behind your projections? How do your needs and options change when you modify those assumptions? This is where experienced advisers including accountants, attorneys, bankers and consultants can assist.
Timeline: How imminent is your need? It takes time to find the right location if considering a move, not to mention construction and moving schedules. If a business is experiencing rapid growth and needs an immediate solution, I often recommend leasing space while thinking through the alternatives.
Current space utilization and efficiency: Before you go through the expense and time of a move or expansion, re-examine your current facility. Could a facilities expert create a more efficient environment? If you have thoroughly defined your facility, you will have the clarity needed to move forward with a decision.
Costs and incentives: The costs and benefits vary with your options. You’ll need to consider differences in real estate taxes, labor, transportation and operating costs. Consider the costs of business disruption, including relocation and potential loss of employees and productivity factors like equipment downtime. Weigh the costs against incentives the company may receive for the project from state, county or local sources. Those incentives can include tax credits, subsidized loans or grants. Good advisers can assist you with finding these resources.
Own or lease: Owning is not the only option. Leasing may make sense if you need speed and flexibility in downsizing or expanding in the short run. It’s best to look at owning real estate as you would any other investment: does it make more sense to lock into a long-term commitment or to stay short and lease?
Employee impact: When business owners think about moving, one factor needs to be front of mind: how will it affect employees? Any time you move a business more than a few miles, there is real potential for losing employees who may not want a longer commute. Openly discussing the company’s plans, getting input and keeping employees informed will help ease transition concerns.
Customer impact: Assess how your customers will be affected. Expanding your business can be seen as a vote of confidence to customers, but will there be downtime? Be positive and share how the changes will improve production timelines or quality standards. If there are potential negative ramifications, such as increased distance to customer or shipping costs, be proactive and communicate these changes.
Factors such as location, site selection, adviser expertise and budget also play a role in a successful decision to move, expand or build. Access to quality information and resources is a great way to begin the process. Sign up for this series using the form on this page as we continue to cover each aspect in depth.