Frog Blog

Site Selection 3 of 3: Analyzing Upfront Cost Basis

Selecting the location of your concept can be the largest deciding factor between the success and failure of your business. It is for this reason that we have written a series of blogs on site selection that will be released each month in the first quarter of this year. The concepts that will be covered are, respectively, Understanding the Market (Jan.), Interpreting Demographics (Feb.) and Analyzing Upfront Cost Basis (Apr.).

Analyzing Upfront Cost Basis

Interpreting demographics lays a foundation for analyzing the surrounding area for potential storefronts. Judging prospective customers attitudes toward your business is key to determining if your target demographic will frequent the new location. Once the target market has been identified, including intangible consumer attributes-the hunt for a new site can begin.

Developers and investors focus on two factors to back a concept. The first is whether or not your venture is unique and exciting. This new undertaking has to take into account the socioeconomic factors in the area. Second is a strategic partnership with a reputable management company that will ease concerns of a bank or investor.

A national coffee chain opened a new location a few hundred yards from a local coffee shop. The national chain’s shop was located in a mid-sized city on a corner with high street and foot traffic near two universities. The national chain languished, while the local shop prospered. Soon the coffee chain shut down that location and the local patrons saw that closure as a victory for the community. The coffee chain offered a good product at a competitive price. No doubt this coffee chain had done its surface level research, but a deeper understanding of the neighborhood may have prevented the failure of the location. The coffee chain attempted to force the concept into a demographic and/or geographic area. Had the coffee chain built its concept around the location-it may still have been open today. This factual example from just a few years ago illustrates the need to observe intangible consumer attributes. Realistically assessing a community’s attitude toward your concept is fundamental to the survival of the location.

A potential site has been found. Many factors exist when evaluating a new location. A careful assessment of the condition of the new space will help determine upfront cost. Areas of concern may include; HVAC, Plumbing, Floor, Storefront, etc. Common terms tossed around to convey the condition of a building may be White Box, Grey Box, and Dark Shell. These terms are a good starting point, but no substitute for a thorough inspection of the site. Assessment of the site is a key component in negotiating a tenant allowance with the landlord.

Assuming that a new location will be a clone of operating locations is a grave risk. Two communities on the surface may appear quite similar. However, prevailing attitudes in a neighborhood can be an obstacle for a new location. Additionally, it is important to maintain the integrity of your concept by finding the right amount of square footage to fit your needs. Larger spaces at great prices may be available, but they could undermine what makes your locations unique. Negotiating based on worst case scenarios can be a valuable tool in decreasing lease amounts and increasing tenant allowances. Lower rent and generous tenant allowances gained through aggressive negotiation offer a vital component to success. Decreased static monthly or quarterly operating cost is another advantage that can be presented to an investor or bank. Negotiating with a business savvy landlord can be extremely difficult. We have found that it is much more successful when done by a third party consultant rather than personally by the new owner or real estate agent.

If you have any questions please don’t hesitate to contact us and stay tuned to for our next Frog Blog.

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