Chapter 12   Premises
Chapter 12   requirements
Chapter 12

This first part of this chapter is concerned with the processes of identifying the space required for various activities, the most suitable types of premises, their locations, their relative costs and the legal aspects of acquiring premises. The second part is concerned with associated issues of insurance related to premises, but broadening out into a general overview of different types of insurances and their relevance to the owner-manager.

The objectives of Chapter 12 are to assist the potential owner manager to review his or her options in examining potential premises and to understand some of the legal implications of buying, leasing or renting commercial premises. It will also enable the reader to assess which types of insurance cover he or she should be considering for both premises, and for the business as a whole, including the physical resources considered in Chapter 13. This chapter also relates to the NVQ Level 3 Business Planning Unit A8, ‘Assess the business needs for dedicated premises’, which is concerned with assessing requirements, selecting suitable premises, and negotiating the terms and conditions of occupancy. Unit A8 links closely to Unit A9 ‘Assess the business need for physical resources’ covered in Chapter 13, and it makes sense to consider the physical resource requirements before or in tandem with the premises requirements, as they tend to be interdependent. The size, volume and extent of physical resources may well predetermine the premises requirements or, conversely, the availability of premises may place limitations on the physical resources which can be utilized.

What sort of premises will I need?

Well, first, just what type of business are you running? A mobile hairdresser or are you a therapist who visits clients in their homes and who may be able to work from your own home, with just the need for a small amount of storage space. A self-employed professional consultant may also be able to do likewise by converting a spare room at home into an office; however, a small office in a commercial location might create a better image in the eyes of their clients and customers. An engineering or manufacturing process would almost certainly be looking for premises with planning consent for light industrial use, particularly if the work involved noisy machinery, dusty of dirty processes, etc. For a retail business, the location of the premises will be a primary factor as the business will need either to be in a place where the customers already go, such as a shopping mall, or in a place where it is easy and convenient for the customers to get to them, such as a retail park. A wholesaler would need to be in a central position from which customers could be supplied and, ideally, close to a good road network.

The cost of retail premises is largely determined by their location. Town centre shops are always expensive to rent, lease or buy, although because of those same high costs, many town centre shopping malls or arcades frequently have a proportion of empty property due to the high turnover rate when businesses fail, or move because of the high rents. Shops located in retail parks are also relatively expensive to rent because of the cost of providing the infrastructure – access roads and parking. In comparison, retail outlets just outside town centres and on main access routes tend to be cheaper, and those in residential areas or on the outskirts of towns can be cheaper still. The relative cost of premises on industrial or commercial estates will depend on a number of factors including their proximity to road networks and motorways, the age and condition of the premises themselves, and the extent and quality of customer parking, security and services. The same basic principle applies to storage and warehousing. To rent space in a farmer's barn may be very cheap, but remote locations and muddy access roads may not be so good in winter. On the other hand, a modern warehouse will be much more secure and accessible, but correspondingly more expensive to rent.

So, in answer to the question What sort of premises will I need?’ we have to consider a number of factors:

•   The type of business which is planned, and the type of premises most appropriate to that business. The physical environment may be important to the product or process e.g. hygienic and easy to clean for food preparation.

•   Whether or not customers will need access to the premises on a regular basis, and where those customers will be coming from.

•   The appearance of the premises if they will be visited by customers regularly.

•   The need for easy access to motorways, road networks, rail links, airports, etc.

•   The likelihood of obtaining planning consent for the proposed use.

•   The need for services and facilities such as customer parking.

•   The need for security.

•   What the business is likely to be able to afford in the early stages.

•   The space requirements.

•   Convenience of access for the owner-manager.

What size premises will I need?

A good starting point for estimating this is to look at the inventory of physical resources which you will need for the business, and which is discussed in Chapter 13. Until you actually identify what fixtures and fittings, machinery, furniture, etc., you will need to run the business, and how this will need to be laid out, it is impossible to make a realistic judgement about the working area required. Probably the easiest way to start is with several large sheets of graph paper on which you can sketc.h various layouts of the ‘ideal’ premises. First, work out the different work areas that will be required and which need to be separated or partitioned off from each other. Let us take several examples.

Example 1

In a reasonably sized high street shop the main area will obviously be the retail section where the customers come to inspect the goods. There will also need to be a stockroom for the storage of backup stock, toilets for staff, a small office space for a desk and telephone for the manager, somewhere secure for staff to leave their bags and coats, and somewhere to make tea or coffee and to wash up. If the shop anticipates a large turnover, there may also need to be a safe within the office.

Example 2

For a small wholesaling business the main premises requirement is storage space for the products, with a small office for dealing with customer enquiries and producing invoices, etc., a toilet and wash room and small room for the delivery drivers or warehouse staff to use during breaks and in which to store their clothes. More important, however, are the dimensions of the storage area, as vertical storage of stock on pallets is far more economical and efficient than having the stock spread around the floor. The space also needs to be planned to allow access for handling equipment such as fork-lifts trucks when goods are received or dispatched, which also has implications for floor surfaces which must not be too rough, and there must be adequate door widths for access.

Example 3

A self-employed complementary therapist setting up a in practice would only need a main room in which to treat the clients, a small reception area and a toilet. The treatment room would house a desk and filing cabinet, the treatment couch, some cupboards with a work top and sink, and some screened space for clients to change behind. The space requirements here are simple and modest, but the room itself would need good heating for the comfort of clients, a washable floor, and there would need to be parking space outside for the clients’ vehicles. In fact the parking area would probably need to be greater than the treatment area.

Having worked out how the space would need to be subdivided, the second stage is to ask yourself how big these areas need to be? To do this it is first necessary to work out what is going to go into each of them, and then to look at the way they will be laid out. You should allow plenty of space in which to move around, especially if stock or heavy items are to be moved using barrows, pallet trucks or fork-lift trucks. This exercise should generate a rough idea of the area needed, although real premises are invariably always the wrong shape and with power points and water supplies in the most inconvenient of places, so it pays to allow for a margin of error. There is bound to be something you have forgotten.

Another aspect which must be considered is that of growth or expansion. All too often owner-managers of new businesses fail to plan ahead and take on the smallest premises that they can manage with, just to save on short-term rental costs. As soon as the business starts to grow, those premises are outgrown, and the proprietor has to go through the expensive and time-consuming process of looking for bigger premises. Apart from the cost of moving and the disruption to trade, this can be particularly expensive if the premises are subject to a minimum rental period, where an early move might invoke a penalty clause in the rental agreement. So, you must ask yourself what size of premises might be needed to meet your planned rate of growth over the next two or three years, as the answer to this may well influence your final choice of location.

What are the options for acquiring premises?

The most appropriate way of acquiring premises is usually predetermined by the financial resources that are available within the start-up business. A lot of potential owner-managers like to start very cautiously by utilizing existing space at home, so as not to commit themselves to heavy regular expenditure on premises until they are sure that the business will take off. This is fine for some activities such as those involving the provision of services by sole traders but, for manufacturing, wholesale or retail activities, commitment to expenditure for premises is usually unavoidable. This is particularly true if the new business involves buying out another established business, such as a shop or garage, or setting up a franchised business associated with a corporate image (e.g. a MacDonalds or Wimpy outlet) where the design, decor and facilities within the premises are specified under the terms of the franchise.

The most common methods of acquiring premises are for freehold or leasehold purchase or some form of rental agreement:

Freehold ownership

Freehold ownership of premises can take two forms. In some cases the business (or its owners) will buy land and develop custom-built premises. This is typically associated with well-established cash rich companies for whom the land is often a long-term capital investment. More often in small businesses, freehold premises are purchased along with the business within them (e.g. shops, pubs, off-licences), or a warehouse may be bought to house a specific business. Typically the process of freehold purchase requires the purchaser to provide 20 per cent to 25 per cent of the purchase price from their own resources, with the balance being funded through a commercial mortgage with a bank or financial institution, repayable over ten or fifteen years. It is a good longer-term capital investment; the premises are an asset on the balance sheet and, of course, there is no rent to pay. Full tax relief can be claimed on interest payments, and capital allowance can be claimed against the purchase cost. Very few small firms, however, have the spare cash or resources to find the 25 per cent deposit for the mortgage without selling or mortgaging their own private homes. Solicitors are essential for the conveyancing of freehold premises, both to ensure the legality of the process, and to check that no undeclared mortgages or charges exist against the premises, or planning consents which might adversely affect the site.

Leasehold purchase

Leasehold purchase provides a method of acquiring a capital asset for balance sheet purposes, without the same level of expenditure as freehold purchase. The business buys the leasehold rights to premises for a period of years (typically twenty-five, fifty or ninety-nine years on a new lease), and then pays the owner of the freehold rights an annual ground rent. The ground rent was traditionally paid on the four Quarter Days i.e. 23 March, June, September and December each year, although that tradition is now fading in favour of monthly direct debits. Once again, the deposit sums are usually around 25 per cent but, as the sum borrowed is lower than needed for freehold purchase, the repayments are more affordable. The repayment period is normally about fifteen years, as for most commercial mortgages, but could be longer for a long residual period or less if there are only a few years remaining on the lease. Leases can also be resold if the firm outgrows the premises.

The big drawback with selling leasehold property is that if a subsequent leaseholder goes bankrupt, the liability for outstanding and future ground rent payments can fall on the original or previous leaseholder. Again, solicitors are necessary for the conveyancing of leasehold purchases, and are essential for the checking of potential liabilities in the event of a future leaseholder defaulting on the lease, and the liabilities reverting to an earlier lessee. It is also worth checking for any restrictive covenants that may occur in leases for older buildings, as these could restrict the way in which the premises could be used.

Rental agreements

Medium or long-term rental agreements are quite popular on modern industrial estates and, sometimes, new businesses are enticed with an initial rent-free period of three to six months. Typically the agreement period will be for at least three years during which the monthly rent payment is fixed at a pre-agreed level. In longer-term rent agreements, the rent may be reviewed at specified intervals.

Short-term rental agreements are quite popular for very new businesses as they do not incur such long-term commitments as other arrangements. Typically rental agreements might be renewed year by year, with an annual rent review. The actual monthly or quarterly payments may be slightly higher than those of a medium-term agreement, but it is normally possible to terminate the agreements with between one and three months’ notice. Another bonus is that the agreements do not require the involvement of solicitors and the associated fees. It is of course still advisable to get a legal or informed opinion (such as that of an estate agent or surveyor) before signing contracts for any rental agreement, in case of any adverse clauses hidden in the small print. It is worth paying particular attention to any clauses relating to the liability of occupants to pay for or contribute towards the upkeep and maintenance of premises. If these are included, then it is reasonable to expect the rents to be adjusted downwards to reflect the liability.

Other aspects of obtaining premises

The reader is reminded of the requirements for planning consent for change of use of premises under the Planning Acts, and the need for Building Regulations approval for any structural changes to premises or drainage etc. These are discussed in more detail in Chapter 5. Similarly, according to the nature of the use of premises, it may be necessary to obtain licences for specific activities from the local authority, under the Local Government Miscellaneous Provisions Act, and to register with the local authority for any food-related businesses under the Environmental Health Regulations.

Information about available premises can usually be obtained from commercial estate agents, most of whom are listed in Yellow Pages. Alternatively the local enterprise agency of bank business adviser may be able to suggest suitable options, and may well know of special incentives or assistance available to potential tenants.

What insurance cover will I need for the premises?

There are basically three types of insurance related to premises – insurance for the building itself, insurance for fixtures and fittings, and insurance for stock of other contents:

•   Buildings insurance is taken out to cover the structure and fabric of the premises. It is usually the responsibility of the owner, i.e. the freeholder or leaseholder of the premises, and any person renting business premises should check to make sure that this is the case. The insurance covers the cost of repair or rebuilding work for any damage to the structure or fabric of the building by fire, storm, flood, acts of God and all-perils, e.g. from a runaway lorry crashing through the walls. It does not cover damage to anything inside the building, or to loss of trade during the rebuilding process. Cover for damage resulting from acts of war or terrorism is normally excluded.

•   Building contents insurance excludes the structure of the building but covers all fixtures, fittings, furniture and equipment etc. within the building for a similar range of perils. For business premises it is normally prudent to keep an up-to-date inventory of all fixtures and fittings, office equipment, machinery etc., with original costs or values, to ensure that the buildings contents insurance is adequate to cover the cost of all contents. This form of insurance only usually covers permanent items of business property, excluding resale stock.

•   Cover for the value of goods held in stock within premises is essential in case of fire, flood, theft etc. Most insurance companies are interested in the value of a realistic average level of stock, and policies will typically allow for seasonal increases in stock levels without extra charge. Again, check to make sure that the level of cover is adequate, as some insurance companies reduce the levels of payout if they believe the value of stock to have been underinsured.

What other types of insurance should I be considering?

•   Goods in transit insurance. Following on from the previous item, any business involved in the sale and distribution of goods should consider goods in transit insurance. Premiums are normally based on the maximum value of each consignment (e.g. van- or lorry-load). Do not let the insurance agent try to set the premium against the total value of stock sold over the year, as this will result in a horrendous premium, and does not reflect the risk of the value of goods which could be lost in one incident.

•   Employer's liability insurance. This is the only insurance which is required by law. Any business which employs staff must take out this insurance to cover its staff against accident or injury in the workplace.

•   Public liability insurance is not compulsory, but is essential. It covers accident or injury to any member of the public or to their property.

•   Product liability insurance provides you with cover against injury or illness affecting your customers or members of the public as a result of the use of your products. For example, food poisoning from food products or skin damage caused by beauty treatments.

•   Professional indemnity insurance covers professional individuals against claims for negligence or misconduct, such as a hairdresser who uses the wrong concentration of bleach and causes the customer's hair to turn orange and fall out. Another example would be a design engineer who gets structural calculations wrong, and the structure he or she is building collapses.

•   Loss of profits insurance is designed to provide an ongoing source of revenue when normal trading is interrupted due to some external factor. For example, if a fire damages a building and its contents stopping trade for two months, the loss of profits insurance would cover the expenses of paying ongoing overhead costs (rent, rates, insurance, staff etc.) until the business starts trading again. Payments are based on the calculated profits (not turnover) which have been lost. Good in principle, but it can take time to be paid out, and for new businesses without a trading record or previous year's accounts it can be hard to prove the real level of profits which have been lost. In the short-term, having this insurance should at least facilitate a temporary bank overdraft, to help until the insurance pays out.

•   Motor vehicle insurance is essential for vans and lorries carrying goods, but also for private cars used in association with the business, for odd deliveries, visits to suppliers or customers or for carrying tools or work-related equipment.

•   Health insurance. Private health insurance can provide a way to prompt treatment in private clinics, bypassing the National Health Service waiting lists. Good, but very expensive for better levels of treatment. The extent of cover is restricted in the lower bands. Health savings schemes are very cheap, and offer cash payments for periods of hospitalization, and other medical expenses.

•   Accident or long-term disability insurance is designed to provide a pension-type income for people who become permanently disabled or unable to work as a result of serious illness or injury. Quite expensive for a good level of cover, but payouts only begin six months after the illness starts, and premiums have to be maintained in the meantime. Existing health problems are usually ineligible for consideration.

•   Key person insurance is often required by banks when loans are made to partnerships. Apart from picking up lots of commission on the insurance premiums, this insurance is often linked to the loans so that the bank loans are automatically repaid if one partner dies. The other purpose of this is that it enables the surviving partner in a partnership, to buy out the share of the deceased partner, if the deceased's estate should require it. It can also be taken out on people who are key to the profitability of a business, and upon whose death the business would suffer financial loss.

•   Life assurance is worth having to cover the value of any loans or liabilities of a business if the proprietor dies, to protect the inheritors of his or her estate. This can take the form of term assurance, i.e. flat rate payments for flat rate cover, with no payback at the end of the period. Term-with-profits insurance gives the life cover but for an additional premium pays back a lump sum at the end of the period of cover. Endowment policies are a longer-term savings-related form of life cover. Premiums are higher, but so are end-of-term payouts if you survive the term.

•   Private pension plans are not insurance policies at all, but must be mentioned in the context of life insurance and personal financial planning. They are increasingly essential for anyone who is self-employed, and whose state benefits are therefore likely to be reduced. Self-employed people can claim tax relief against the pension contributions.

•   Combined policies – often called shopkeeper's policies – are special insurance packages for various sectors of business. For example, a hairdresser's policy might cover a core package of employer's liability, public liability, professional indemnity, and theft and damage to equipment, linked together for a very competitive premium. There is also the option of extending the cover beyond the core parts for additional premiums.

Finally, insurance brokers deserve a mention as a means of obtaining fairly objective advice, and normally very competitive quotes, for business insurance. They earn their income (from the insurance companies, not from their clients) by matching the policies to their clients’ needs and pockets. In recent years they have been hard hit by the growth of direct insurance over the telephone, but for small firms with widely varying insurance needs they can provide an efficient and cost-effective means of searching the insurance market for the right policy. Most of them are small businesses too!