Walking the Location Tightrope

Editor's note: Since 1964, business-management counselors at the nonprofit organization Score have given free advice to small-business clients spanning every industry. They currently serve nearly 400,000 entrepreneurs nationwide each year -- check in every week for their prudent advice.

Last week Harry Dannenberg, chair of Score NYC's seminar committee, exposed the top 10 small-business killers. This week, we examine one of the most dangerous of these.

"Have you ever seen a business plan?" Dannenberg asks as he casts a challenging look at me over his spectacles. He promptly produced this outline for an entrepreneur's most effective means of self evaluation.

The plan devotes an entire section to justifying your location choice, because a bad decision can quickly and mercilessly drain the lifeblood from a small business.

Should You Love Your Neighbor?

Competition can be a liability and an asset, Dannenberg points out.

Your business can benefit from the traffic generated by other stores in the area (think 34th St. in New York City). But that's also why the rent can be so high in these high-density areas, where value is enhanced by traffic. On the other hand, if you build in an isolated location, the rent may be dirt cheap, but nobody will come by.

"It's a balancing act," says Dannenberg. "There's a direct relationship between cost and risk." The key is to get into a place with opportunity for growth, like Williamsburg, Brooklyn, once was before an influx of people soon followed the businesses that opened up there.

Snoop Around

If you're the first of a certain business opening in a neighborhood, that's not necessarily a good sign, warns Dannenberg. One of his clients thought opening the only laundromat in a neighborhood would bring droves of resident with their soiled laundry. But after closer inspection upon Dannenberg's urging, he found that the majority of residents lived in single-family homes with washers and dryers or had washers and dryers in their apartment complexes.

While resources like local business libraries, such as the Science Industry and Business Library in Manhattan, can give statistics on your neighborhood's demographic by zip code, that's not enough to answer the most important question: "Can the neighborhood really support my business?"

To truly understand your neighborhood and demographic, says Dannenberg, get as close to the environment as you can. Stand by the subway or bus stop, and even interview passersby and business owners. Also try talking to real estate brokers who often know the neighborhood inside and out.

People done in by their location "weren't taking the proper interrogative attitude," says Dannenberg. "They get sold on an idea and don't consider if it's the best business for the neighborhood they're selecting."

The Leasing Game

Patience is the best virtue when negotiating a lease. Emerging neighborhoods may take a year or two to develop and you won't likely see a profit in the first two years, so make sure your lease doesn't end before you can start cashing in, and that you have enough capital to carry you through your startup period.

Even if the cash starts flowing in from the beginning, the landlord could double the rent after a two-year lease and your profits could suffer. "The more of your own money you put into growing a business through capital improvements such as floor covering or remodeling, the longer a lease you need to recover your investment," says Dannenberg.

Get in a lease with enough longevity to protect against the tragic loss of your carefully invested money, but not so long that you risk being tethered to a sinking ship. Dannenberg suggests at least a five-year lease with a renewal option of five years.

Even if you're offered a delicious price in a high-density area, stresses Dannenberg, don't take it unless you have a renewal option.

For more information, call Score NY at 212-264-4507 and ask for Harry Dannenberg.