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OPERATIONS

Get Out of the House

Is it time to get out of the garage/basement/living room/incubator? That first real office can be tricky.
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For the most part, Jayesh Doshi is perfectly comfortable with things that are very, very small. Doshi, after all, is the founder and CEO of eSpin, which is based in Chattanooga, Tenn., and manufactures nanofibers--strands of synthetic and organic fiber that are a thousand times smaller than a human hair. But five years after launching in a small-business incubator, the growing company's cramped quarters were becoming too much to bear.

Doshi had started out with 800 square feet of office and laboratory space that felt roomy at the time. But interest in nanofibers was growing. Aerospace firms use them to create filters for fuel cells, for example, while biotech firms use them to repair human tissue damage. Before Doshi knew it, his nanofiber business became a huge space hog. The incubator gave eSpin more square footage, and then more and more again. By 2003, eSpin's 20 employees were occupying 6,500 square feet of space, and Doshi knew that all too soon even that wouldn't be enough.

The lack of physical space wasn't the only problem. Doshi had begun selling to some of the world's largest companies. But when clients came calling, he could see their eyes fill with doubt the moment they entered the building and realized that they were in an incubator. "They didn't get the confidence that we could deliver a million pounds of material," Doshi says. And the fact that eSpin didn't have its own building also made his more security-conscious clients skittish. Of course, Doshi had never planned on staying in the incubator forever but, he says, it seemed the time had come to, well, hatch.

Almost all entrepreneurs go through the same rite of passage, facing up to the decision to leave the garage/basement/living room/incubator. And the soft real estate market these days makes the prospect of leasing their own four walls even more enticing. In the fourth quarter of 2003, according to stats compiled by real estate firm Cushman & Wakefield, asking prices for rent were 15% to 20% lower than the most recent peak in the fourth quarter of 2000. But moving into an office is a huge step, and it's important to think carefully before taking it. After labor costs, office rent tends to be the largest expense most business owners face. Making the move before you're truly ready can cost you plenty--not only in cash, but in headaches, as well. The question is, How do you know it's time to make the leap? And what type of space is best for you?

The most important thing, says S. Thomas Emerson, director of the Donald H. Jones Center for Entrepreneurship at Carnegie Mellon University in Pittsburgh, is not to get caught up in flights of entrepreneurial fancy. New entrepreneurs, he finds, tend to imagine they're running a more advanced company than they really are. "They lease space for the company that they wish they had," he says, "instead of for the company they do have." He suggests staying put in less expensive space as long as possible.

It's also important to make sure your move is necessary for your business and not for your ego. In the case of eSpin, a lack of physical space and a lack of client confidence pointed clearly to the need to move. For Cynthia McKay, CEO of Le Gourmet Gift Basket in Castle Rock, Colo., a combination of factors propelled her to move her business from her home into its own space: her barking puppy drowning out phone calls, employment agencies refusing to work with her, and security concerns about inviting first-time clients into her home. She moved into her first office 10 years ago, now has 28 employees, and credits the expansion to the move.

Even after you've made the decision to move, it makes sense to proceed cautiously. You don't want to leap into an ironclad five-year lease, says Emerson, and then find that your billings have plummeted and you really should have gone for a smaller space in a cheaper neighborhood. He suggests basing the decision on how much cash you've got. "If you've got six months of cash on hand," he says, "you should get a facility that you can live in for six months. If you've got a year of cash, consider a facility that you can live in for a year."

Since most start-ups aren't flush with cash, this means that you're going to need to get friendly with the concept of compromise, says Roy Hirshland, CEO of T3 Realty Advisors, a real estate company in Waltham, Mass., that specializes in working with tech companies. The kind of compromise you make depends on the sort of business you have. If you've got clients visiting you all the time, or if you're in an image-conscious field, an impressive office with all the trappings of success might be essential. In that case, consider either securing that space short term by subleasing from a corporation that has downsized or taking a first office in an executive suite.

Subleasing made the most sense for the Valen Group, a Cincinnati-based consulting firm, says Stuart Rabkin, COO. Four years ago, the then two-person company considered offices in less expensive buildings. "We saw a couple of places where we decided that we'd rather work out of our cars than in a place like that," Rabkin recalls. Also, they figured, a dive would turn off their clients, as would an executive suite, which screamed "start-up" to Rabkin. Eventually, Rabkin decided to sublease. Thanks to the soft economy, many large corporations in his area had downsized, leaving vacant thousands of square feet of space complete with furniture and wiring. While you can often cut a good deal on a sublease, the challenge is that subleases are by nature a short-term solution, which means that you'll be moving a lot. "We're on our fourth lease in four years," says Rabkin, but hopscotching around has allowed the company to increase its space gradually as it's grown from two employees to 10. The fourth lease, says Rabkin, is a long-term one that should house the company for years to come.

New owners often make the mistake of leasing more space than they really need.

Although Rabkin didn't care for the executive office suite option, it's a popular choice, says Hirshland, among new entrepreneurs seeking the smallest up-front commitment. Executive office suites are a lot like hotels, he explains--instead of renting rooms, you rent offices. The leases are flexible, you don't have to invest in furniture, a receptionist, or potted plants, and you'll often have access to amenities like a conference room. The disadvantage is the cost: Hirshland estimates that you'll pay 30% more than you would for your own space because you're paying for services whether you need them or not. One consideration: You won't be able to use your office to display a sense of identity--no logo on the wall behind the receptionist.

Yet another option is finding regular office space with a traditional lease but at a bargain price. This can involve some shoe leather, but it's the move that Laura Berry, president of Soundview Medical Supply in Seattle, made when she couldn't squeeze a third employee into her first office. She advises making sure you make a fair comparison between options. In her first two offices, she learned the hard way that if you have to foot the bill for "extras" like heating or cooling your office after 5 p.m., and parking for yourself and your employees, your "bargain" can disappear.

You also want to make sure that you compare prices for the amount of space that can actually be occupied, says Paul Rich, principal with the Siegel Rich division of Rothstein Kass, an accounting firm based in New York City. There's a difference between "gross square footage," which is the total space of the office, and "net usable square footage," which is the space that isn't taken up with things like radiators and other permanent structures.

Once you've found your dream deal--or at least, your dream-of-the-moment deal--see if your landlord has room for you to grow. Remember Doshi, the nanofiber guy? The incubator was an ideal place for him to launch his business because it offered the flexibility to grow--an advantage that Doshi did not soon forget. After six months of looking, he found a 40,000-square-foot facility that he felt he could afford and signed a five-year lease. He believes the space may suffice for about five years, but he's already thinking beyond. "The building sits on 10 acres of land," he says, "so we'll have the ability to expand."

Of course, the most important thing is to make your business a success. That way, even if you have to compromise on your first office, it will only be just that... your first office.

Leasing 101

  • Check your ego at the door
    Be sure that the move is necessary for your business and not your ego.
  • Follow the money
    Got six months' cash on hand? Find space that will suffice for six months.
  • Consider a sublease
    Many corporations have downsized, leaving furnished space vacant.
  • Bring a tape measure
    Make sure you only pay for square footage that can actually be used.
Last updated: May 1, 2004




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