Thinking of Expanding?

Growth is good. Still, it is not without its problems. Growth leads to the need for more employees, more trips to the bank for financing, and more day-to-day headaches. And if you keep growing, you will eventually need more space in which to operate your gift business. That means building or expanding. But new construction is expensive, and it's important to build the right facility in the right location at the right cost. Why Build?

Let's consider some viable reasons to build.

• Poor Location: If your location is inaccessible, then a move might be just the ticket.
• No Room to Expand: If you are beginning to reach full capacity at your present site, it might be time to build a new facility.
• Competitive Environment: If your gift business faces fierce competition in your existing location, a move to a less competitive environment might open up a whole new sector of business.
• Ownership: Your monthly debt payment might not be much more than your rent payment.

There are a couple of important things to remember when selecting a new location. First, be willing to consider different options. Look at a number of alternative sites in the community in which you are located before settling on one. Also, even if you take the risk of losing existing relationships in the process, you might want to consider moving to a new city or county.

Second, be well informed. Talk with key players in the real estate business, your CPA, your attorney, and other business owners before settling on a new location. Obtain demographic information on prospective locations from your local municipality. How Much Can You Afford?

There are two factors to consider when estimating how much you can afford to spend: the previous cash flow generated by your business, and the projected increase that might result from a new location.

Computing your previous cash flow can be accomplished with a simple formula: Gross Cash Flow Available for Debt Service = Net Income After Taxes + Interest + Depreciation.

The expansion will have to create sufficient cash flow to cover the increase in debt service. Trying to compute what might happen in the future is an inexact science, of course, but there are some tangible factors that you can consider. If you have been keeping track of the amount of business you have been turning away, then you should be able to compute the lost profit on this business. Also, if you are adding new equipment or services, you can estimate additional business you can expect from these new features. How Much Will It Cost?

You will have three major areas of cost for your new location: the land, the building, and the furniture and fixtures. The cost per acre of commercially zoned land varies greatly from region to region. If you have to purchase land, seek input from a trusted real estate broker and talk to other business owners about a reasonable cost for land in your area.

If you are constructing an entirely new facility, focus on something basic. You can expect to pay about $60 per square foot for a functional but attractive brick-and-mortar building. In your budget, always include a cost contingency of about 10 percent for overruns. How About a Contractor?

Finding the right contractor could be the most important element of any new construction. First, check references. It's best if you know someone who has used the contractor before, and can offer feedback. No matter what, never sign on with a contractor without first seeing other work he has done.

There are many types of contracts, but a fixed-cost contract is the most desirable. With a fixed-cost contract, the contractor must adhere to the costs submitted unless you approve any changes.

Another key responsibility is dealing with the myriad permits required. Clearly specify two things: The contractor will obtain all necessary permits, and he will absorb the costs associated with the permits.

Finally, ask several contractors to bid on your job. But you shouldn't necessarily take the lowest bid. If the contractor tries to cut corners, or if he purposely underbid and plans to increase the cost with changes, it can lead to significant problems. How Will You Pay?

Almost all projects involve outside financing, and that means a trip to the bank. In considering your loan request, the bank will go through a similar process to the one you will have gone through if you follow through with your own cash flow analysis as recommended above. Even if your gift business has been profitable, if the historical cash flow has not been sufficient to support the increased debt that will result from the new building, be prepared to explain why you believe that you can increase your cash flow.

In most cases, you will be expected to invest 10 to 25 percent of the total cost in cash. For a conventional construction loan, you can expect to pay interest only during the construction period. Once completed, your loan will be "termed out" with an amortization period of 15 to 20 years.

Whether you are contemplating new construction or a renovation, make sure that the sacrifice will reap a just reward. Then prepare yourself for a challenge that will require effort on your part to ensure that your facility comes out right.