Monday, February 25, 2013

Office Space - The First hurdle for any Entrepreneur



It is a typical story of any entrepreneur: First start the company and run the business from home, taste the initial success and then comes the first hurdle - finding an office space.  In case of retail business, finding the right retail space itself is "the" first challenge. When it comes to retail business - be it a small shop or bakery or restaurant, there are three important factors: Location, Location & Location.

Recently, I had a chat with an entrepreneur - who is into specialty foods. She currently has a great location for her store in Jayanagar 4th Block, right on the main street! But then she has to move her store because the landlord is demanding a much higher rent than what her cash flows can afford. After all there is no point in toiling hard for a business - only to give away all the profits in rent.

Choosing the right space for a business is a huge decision. Especially for start-ups and small business owners and taken with great due diligence.

There are three major aspects when it comes to choosing an office space.

1. How much you can afford?

For a start-up the office space represents costs. If its a plug and play facility - i.e., one with all office furniture and networking done in such a way that one can just walk in and start operations. In India there are plug and play facility that costs Rs 5000 to Rs 7000 per seat per month. But most facilities in India may not be a plug and play type, so one also needs to set it up and in such cases the tenant must bear the cost of doing up the place. The cost of doing up the interiors may wary from Rs 1000 per square feet to 3500 per square feet, Since this is a rented space - you are expected to take out all the furnishings when you vacate the space. In some cases the landlord may pay for a part of the costs incurred towards the office interiors.

For a startup, one need not look at regular office spaces. To keep the costs low, one can opt for a basement, a garage or even renting a house. Such kind of non-regular spaces will help to keep the costs low during the early stages when cash is difficult to come by. For example, both Apple and HP started in a car garage, while Marc Zekerberg rented a house in Palo Alto.

Here in India, Infosys operated out of Naryan Murthy's house for the early years.

Entrepreneurs must plan out how much they can afford first and then start looking around for places that meet their budget. For startups that are moving out of their initial incubation centers, be it universities or garages or basements, the budget is greatly influenced by the amount of office space needed. It is easy to overestimate growth and sign-up a lease for much larger space - but that involves high costs. So one has to be prudent about it. Take only the amount of space needed for next one year and avoid over renting. Negotiate a shorter lease terms for flexibility. For example have a lease agreement for one year with an option of extending the lease for 3 years and/or options to rent additional space as your business grows.

When it comes to renting a proper office for the first time, one needs to consider other charges apart from the basic rent: Utilities (power, water, etc.) and Common Area Maintenance. Ensure that you have understood all the charges and have planned for it in your cash flow plans. Better still negotiate all charges upfront and have it clearly documented in the lease agreement. This gives you the flexibility and lower upfront costs.

2. How much do you need?

How much office space is needed is primarily driven by the business plan. Based on the business plan, number of employees and hence the total space needed can be planned out. The amount of space needed can be optimized by having flexi seating and having mobile workers. Today, employees tend to bring their own laptop and Internet connections - and in many cases are willing to work from home and they can come to office only when needed.

3. Which Location?

Once the budget is worked out and the amount of space is known, then it is time to work out the location. Location often becomes an outcome of the budget and amount of space. Renting an old office space or at the outskirts of the city could be cheaper than renting a new office space. So shop around and choose the location that best meets your needs.

There are few factors that need to be considered while selecting the location. The top priority will be availability of labor. Are employees willing to come and work in that location? What about the safety and security of the location? These issues have to be addressed  by choosing a proper location which has the required office that meets your budget, and a place employees are happy work.

Closing Thoughts

Choosing a right office space is critical for a startup and typically one will need help of Realtors (real estate agents) who can comb the available options and show you the ones that might fit your needs. It also makes sense to get the lease agreement reviewed by a lawyer to prevent nasty surprises and unnecessary litigation.

33 comments:

Chelsea Hurst said...
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Nancy Farley said...
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Vikrant Singh said...

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Leo Interiors said...
This comment has been removed by a blog administrator.
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Wardha ITPark said...
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Wardha ITPark said...
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Abram Singh said...
This comment has been removed by the author.
Abram Singh said...

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