When a small dance business owns its own space instead of leasing, what it’s really buying is a measure of financial stability. That can be a boon to future growth. Here’s how one dance retailer weighed the pros and cons of purchasing a building and then made it happen.
Adrienne Hansen, owner of On Your Toes Performance Wear in Durant, OK, has been in business less than two years, but this spring she made a bold move: She bought a small building to house her dancewear boutique.
Hansen, a former dancer and dance teacher who is now a dance mom to a 12-year-old daughter, spotted a retail opportunity in Durant, an up-and-coming small town whose nearest big-city neighbor is Dallas. The town didn’t have a dancewear shop and neither did any of the neighboring towns. She leased a 1,350-square-foot space in Durant’s Historic Main Street district.
The town’s dance population welcomed Hansen, and her business took off. Southeastern Oklahoma State University, which offers a dance minor, is a good customer source, as is the nearby Choctaw casino. (Hansen is a preferred supplier for the Choctaw Nation; the casino recently bought black dance tights for all its waitresses because they are more durable.)
But the customer-parking situation at Hansen’s rented space was “horrible,” she says, and she was facing the prospect of a bar opening next door. She was paying $1,550 a month in rent and utilities, which she felt was “very high,” and she wanted to reduce her overhead.
A Strategy to Cut Costs
Initially, Hansen simply looked for another rental space, but “when we saw the opportunity to purchase, we decided purchasing was the best option,” she says. She put down $20,000 on a $100,000 house one block off Main Street that had been converted to commercial use by its owner.
She got a big break from the seller, a building contractor, on the build-out of her new 1,400-square-foot space. Hansen spent $10,000 on renovations, which included removing a wall and adding a handicap ramp. (More typically, a retail build-out averages $56.53 per square foot, according to Chain Store Age, meaning that Hansen would have been looking at spending more than $79,000.) While the retail area occupies the entire first floor of the house, she uses the upper floor for storage.
Hansen immediately reduced her overhead by $800 a month, dropping to a combined payment of $750 for the mortgage and utilities. She’s pleased with the stability the purchase offers. “The mortgage payment will stay exactly the same, and I’m hoping the utilities will go down somewhat,” she says.
Control of Costs, Yes, But Design, Too
Equally important, Hansen got to design exactly the space her store needed. “We were able to create different areas for our customers—adults, tweens, kids,” she says. Hansen stocks traditional dance, cheer and gymnastics apparel as well as pointe shoes. Although she’s in the Bible Belt, she doesn’t carry praisewear, since she found it didn’t sell in her particular market. Likewise, yoga wear has been a flop for her. Her surprise success? Clogging gear.
Hansen tried to minimize the amount of time her store was closed during the transition, but the move did require two weeks without income. “It definitely affected us in a big way,” she says. “We had to make some choices about inventory and payroll.” Still, she has no regrets. “We’re in love with the new place. We have a lot more authority over what we’re able to do, and the financial situation is much better. We’ve gotten nothing but positive feedback from customers.”
Hansen definitely looked before leaping into the deal: She consulted her accountant and other successful small-business owners. “I asked a lot of different people. They all told me, ‘If you can buy, you should buy. It becomes an asset,’” she says. Hansen’s banker advised her that this particular property has strong potential to grow in value over time because that sector of Durant (which is right around the corner from the bank, First United) is experiencing a mini boom. So rather than simply paying rent, Hansen is investing her monthly overhead in an asset that will gain in value over time, increasing both the value of her business and her personal net worth.
That Was Good Financial Advice
Rachel Scott, a financial advisor and planner who is president of VS Associates, Inc., in Canoga Park, CA, says Hansen got good advice. “The advantages of owning property outweigh the disadvantages. Just having control is a major advantage. If you’re in a place you feel is a sanctuary for your business, you’re going to perform better,” she says. “Plus all of the tax write-offs. You’re going to have depreciation you can deduct on owning that you couldn’t on renting.”
Scott notes that small businesses structured as limited-liability corporations (LLCs)—as On Your Toes Performance Wear is—are eligible for bonus depreciation, so deductions for improvements can be taken more quickly. “Bonus depreciation is a wonderful thing,” Scott says.
As far as disadvantages go, Hansen sees relatively few: “One negative factor is that you bear the brunt of everything that needs to be fixed,” she says. Her property is at least 80 years old, so significant repairs are always a possibility. And although she was fortunate to have a relatively inexpensive renovation, she notes, “renovation costs are something people really need to think about—how much more you need to put in to remodel.” She was also unpleasantly surprised by the increased cost of insurance as a property owner. “Our insurance went up quite a lot—more than I was expecting. But we live in Oklahoma, where there are lots of tornadoes,” she says.
Scott observes that some business owners may also see being saddled with a mortgage as a disadvantage to buying. “Some people may be concerned about the long-term nature of the loan commitment,” she says. “But that’s true of a lease, too.”
Hansen says she isn’t worried about being locked into her space. The downtown neighborhood she’s located in is on a growth spurt, and she figures that if her business eventually outgrows the little house, she can always move to a bigger site and lease her property out—another opportunity for income and a source of more tax breaks. “Ideally, if we do outgrow our space, we would be able to build our own next time,” she says. “It’s always wise to be looking ahead to the next step.”
Anne M. Russell is a Los Angeles–based writer who covers small business, fitness and technology.