MODULE 4

FACTORS AFFECTING THE LOCATION OF PROJECTS

CONTENTS
1.0 Introduction
2.0 Objective
3.0 Main Content
3.1 Factors Affecting the Location of Projects
3.1.1 Nearness to Markets
3.1.2 Communications Links
3.1.3 Closeness to raw materials
3.1.4 Availability of appropriately skilled employees
3.1.5 Opportunity for waste disposal
3.1.6 Availability of power supplies
3.1.7 Availability of land
3.1.8 Government incentives
3.1.9 Availability of Good Road Networks
3.1.10 Availability of a Good Rail System
3.1.11 Nearness to Airports
3.1.12 Political Considerations
3.1.13 Intervention of Projects
3.2 Importance of location in Business
3.2.1 Advantages and Disadvantages of buying a business
3.2.2 Deciding to buy a business
3.2.3 Preparing to buy a business
3.2.4 Conducting due diligence
3.2.5 Making an offer
3.2.6 Drafting a purchase contract
4.0 Conclusion
5.0 Summary
6.0 References/Further Readings

1.0 INTRODUCTION
In this unit, we shall discuss factors affecting the location of projects. This is important
because it enables us as analysts to have a proper knowledge of the key issues relating
to project locations. Understanding this unit will give you the advantage of knowing in
advance what should be and what should not be when issues of project location are
raised. For example if a project is located in an area without any justification, the project
analyst should be aware of this based on his or her previous knowledge of project
location issues.
2.0 OBJECTIVE
At the end of this unit, you should be able to:
● Explain the factors affecting the location of projects.
● Importance of location in Business

3.0 MAIN CONTENT

3.1 Factors Affecting the Location of Projects
The location of a business is the place where it is situated. There are a number of
factors that need to be considered in choosing a location for a business. One of the
earliest decisions any entrepreneur has to make is where to locate his or her business.
In order to do this, he or she has to make a careful assessment of costs. The ideal
location would be one where costs are minimized. The entrepreneur would need to look
at the benefits which each area had to offer as well as any government help which
might be available.
There are several reasons why an organization might decide to open new branches or
relocate its existing operations. It might want to expand the business, so it will open
branches in cities where the organization did not previously have a presence.
A business might also want to restructure or modernize its operations. It might do this
by bringing together some existing departments into new purpose built premises. It
might decide to shut its less profitable operations and open branches in locations that
offer more business potential.
A business will have to consider many factors when determining where to locate a new
branch or operation. Usually, it will have to balance several factors in making a decision.
Sometimes one factor may sway the decision:
 ● It may choose a site with the cheapest land or buildings.
● It might decide on a location that is convenient for key employees. A business
needs to be able to recruit staff with the right skills base.
● It might choose a site that has easy access to raw materials. For example,
many frozen food factories are located near fishing ports to reduce transport
time taken and to keep fish fresh.
● The key factor could be the transport and service infrastructure. Many
businesses require easy access to good road and railway links and modern
telecommunication services. These ensure that they can meet service or
delivery deadlines.
3.1.1 Closeness to Markets
This is the case with fresh produce - so that for example, many supermarkets
operate their own bakeries.
3.1.2 Communications Links
Transport is an important factor supporting access to markets. Modern
companies also need to locate where they have access to excellent information
technology links.
3.1.3 Closeness to raw materials
Locating close to the raw material supplies can reduce where raw materials are
heavy and large quantities are used up in production costs. This is particularly true
for industries like steel, which uses large quantities of iron ore in the production
process.
3.1.4 Availability of appropriately skilled employees
Some industries rely heavily on a highly skilled workforce. In contrast, other
industries that require cheap labor will seek locations where there are a lot of
people looking for work that are prepared to accept low wages.
3.1.5 Opportunity for waste disposal
Waste is an important side effect of modern industrial processes. Firms that
produce a lot of toxic material (e.g. some chemical plants) will seek to locate where
there are facilities available for recycling and safe disposal of their products.
3.1.6 Availability of power supplies
Energy supplies can typically be found in most parts of the UK - e.g. electricity
pylons and cables. Large firms are able to negotiate bulk discounts when they
purchase power from energy retailing companies. Being able to negotiate a good deal in
a particular location might be influential as a locational factor.
3.1.7 Availability of land
 Is increasingly important today. Land is becoming increasingly scarce particularly
in urban locations, forcing rental prices up. Property prices are particularly high in major
city areas such as Central London and Birmingham. Companies like Land Securities
are developing new sites that are suitable for modern businesses tolocate to.
3.1.8 Government incentives
Are important in reducing costs of locating in certain areas. These incentives are
in effect subsidies provided by the UK government.
A footloose business - is the term used to describe a business that is not tied
down by particular locating factors. It can more or less set up anywhere.
Industrial inertia - describes a situation where a business sets up in a particular
location and then the original factors that led it to locate, become no longer
significant - but the firm does not move.
3.1.9 Availability of Good Road Networks
Availability of good road networks is another major factor influencing the location of
projects in the economic landscape. Road networks are very important. They are
important for the movement of essential raw materials from raw material sources to
factories and also for the movement of finished goods to the markets where they are
needed. Most investors in the economy are usually attracted to areas with good road
networks. Good road net works reduce the cost of transportation.
3.1.10 Availability of a Good Rail System
Another important factor influencing the location of projects is the availability of a good
rail system. A good railway system ensures cheap transportation and evacuation of raw
materials from their sources to factory locations and also the movement of finished
goods to markets. You may observe that the development of trading locations in Nigeria
seemed to have followed the railway system. The North – East and West rail system
runs through towns today which have become trading posts. Kaduna-Abuja,
Lagos-Osun, etc., all enjoy good trading activities because they are located along
railway line routes.
3.1.11 Nearness to Airports
Another identified factor affecting location of projects is nearness to airports. A lot of
businesses tend to be located close to Airports. encourage quick movement of people
to and from various locations. If you take a good look at the country today, the towns
that are served with air links tend to be enjoying faster economic growth and
development. Lagos, Abuja, Kaduna, Ibadan, Delta, Benin, Port Harcourt, Calabar,
Enugu, etc., enjoy good air links which facilitate the movement of people.
3.1.12 Political Considerations
The location of most business projects is driven mainly by economic motives. Private
sector projects are mainly profit-driven and their location is based only on economic
merits. Also the public sector, since the era of economic reforms, has bought the idea of
economic reforms and is now locating projects based on economic merit and viability.
However, not all projects are located based on sound economic judgment. Political
considerations occasionally play very important roles in deciding where a project will be
located. For example, an oil refinery may be located very far away from crude oil
sources. The cost of transporting crude oil to the refinery may result in the refinery
operating at a loss.
3.1.13 Intervention of Projects
Intervention projects are those projects which are conceived and located within specific
areas to correct inequalities in distribution of resources. In the emerging political
dispensation, the issue of uneven development has been brought to the front line of
discussions. Complicating the discussions is the issue of resource control and the
attendant political and social implications.
The Niger Delta region of Nigeria produces a major percentage of the oil revenues of
Nigeria. Recent thinking is that the region has not received sufficient attention as a
major oil producing region. Currently, the federal government is focusing attention on
the region and a lot of developmental projects are now springing up in the area.
3.2 Importance of location in Business
Choosing a location for a new business is one of the most important decisions
entrepreneurs make during the planning phase of launching ventures. The location of a
business can affect many aspects of how it operates, such as total sales and how costly
it is to run. Even home-based businesses and online businesses can be affected by
location-dependent rules and regulations.
Accessibility
Location is of utmost importance to businesses that sell goods or services directly to
customers at brick-and-mortar establishments. For example, a card shop located in a
popular mall is likely to attract more customers than a similar shop located in a
run-down part of town. Location can also influence a business's ability to market itself. A
business with a storefront on a busy street is more likely to attract customers with signs
and storefront displays than a business that is not in a busy area.
Competition
A business's location can affect the competition it faces from businesses that sell similar
products and services. For instance, an upscale neighborhood in a major city might
have dozens of ethnic food restaurants, while a small town might not have any
businesses that sell ethnic food. Starting a business in an area with few direct
competitors can increase the likelihood of attracting customers.
Operating Expenses
The location of a business can influence the total cost of operation. Renting a storefront
on a popular street or in a highly trafficked mall is likely to be more expensive than
opening a store in a small commercial district in a residential area. A business could be
better off opening its doors in an area that is cheap, even if it results in fewer total sales.

Taxes and Regulations

The location of a business determines the state and local taxes that owners have to pay
and the regulations they must follow. Income tax and sales tax rates vary from one area
to another, which can have a significant impact on a business owner's earnings.
Government zoning laws can limit the size and construction specifications of buildings
and the use of signs. State and local laws can also affect the types of permits and
licenses necessary to operate a business.
Home Businesses
Home-based businesses offer a variety of advantages over companies located away
from the home, which can make them attractive to small-scale business owners. The
cost of operating a home-based business is typically lower than paying to rent retail
space or office space in other locations. Home offices can cut down on travel costs and
make it easier for owners to balance work with home life. The cost of operating a home
office is also tax deductible.

3.2.1 Advantages and disadvantages of buying a business

Buying an established business rather than setting up a new business has many
advantages but is not without risk. You will need to know the advantages and
disadvantages of buying an existing business and be clear about your ability to run a
business.
Advantages of buying a business
Buying a business is generally considered less risky than starting your own business,
especially if you can buy a well-managed, profitable business for the right price.
Consider these advantages:
● The difficult start-up work has already been done. The business should have
plans and procedures in place.
● Buying an established business means immediate cash flow.
● The business will have a financial history, which gives you an idea of what to
expect and can make it easier to secure loans and attract investors.
● You will acquire existing customers, contacts, goodwill, suppliers, staff, plant,
equipment and stock.
 ● A market for your product or service is already established.
● Existing employees and managers will have experience they can share.
Disadvantages of buying a business
Keep in mind that not every business on the market is a good prospect. Many owners
will be selling unprofitable or under-performing businesses. While this can be a chance
to buy and develop a cheap business, it can also be a risky investment. Consider these
disadvantages:
● The business might need major improvements to old plant and equipment.
● You often need to invest a large amount up front, and will also have to budget
for professional fees for solicitors and accountants.
● The business may be poorly located or badly managed, with low staff morale.
● External factors, such as increasing competition or a declining industry, can
affect future growth.
● Under-performing businesses can require a lot of investment to make them
profitable.
● The seller's personality and their established relationships may be a major
factor for the success of the business.
3.2.2 Deciding to buy a business
Before you think about buying a business, it's important to know what's involved and
whether you're the right person for the job. Running a business is demanding, so take
some time out for self-assessment. You need to be sure you have the necessary
finances, skill and ambition to succeed. Once you've decided you're ready to be in
business, you then need to find a business that suits your abilities, finances and goals.
Consider:
● a preferred industry (one that matches your experience and meets your goals)
● a preferred business model (retail, wholesale, national distributor, on-line
supplier, etc.)
● a favourable geographic location (ideal customer exposure, potential for growth,
distance to travel to and from work, etc.)
● opening hours (e.g. most retailers trade 7 days, restaurants often trade nights,
some businesses are on call 24/7)
● how much money you have available to fund the purchase and working capital of
the business.
Where to find businesses for sale
There are many ways to find businesses for sale. Businesses are often advertised
through:
● newspapers
 ● business broker websites - business brokers act as intermediaries between
sellers and buyers
● real estate agency listings
● trade journals and industry magazines
● the Franchising and Business Opportunities Expo
● commercial websites.
Your accountant may also have a list of clients who are looking to sell their business.
Remember, some 'fire sale' offers may seem too good to be true, so always be sure to
conduct due diligence with help from your solicitor and accountant.
3.2.3 Preparing to buy a business
Once you have decided you're ready to buy a business and have checked
advertisements of businesses for sale, you will have a shortlist of potential businesses
to suit your budget, interests and goals. The next step is to prepare thoroughly by
seeking professional advice, getting your finances in order and starting to research the
businesses in more detail.
Organising your business advisers
Getting sound professional advice is a vital part of the due diligence process. At a
minimum, you will need the services of an accountant (to investigate the financial data
and operations) and a solicitor (to investigate any regulatory issues, check licences and
registrations and draft a purchase agreement).
Checking your finances
Buying a business is a significant investment, so you need to sort out your finances
early and be well prepared and professional when applying for a bank loan or
approaching potential investors.
This will give them confidence to back your business and convince the seller you are
serious.
When checking your finances, consider:
● the purchase price of the business
● stamp duty, usually payable by the purchaser
● the working capital requirements for your business (your cash flow projections
will show that figure)
● professional fees and charges related to the purchase
● any loan repayments and servicing costs, if applicable
All commercial lenders use the following criteria to assess loan applications:
● your ability to service loans (interest and periodic repayments)
● security (most banks require a 1st mortgage on real estate security and may lend
up to 65% of the real estate asset being offered as security)
 ● the management and business skills of the borrower
● the trading history of the business (at least three years prior to purchase)
● the profit and loss and cash flow forecasts for three years (forecasts need to be
supported by realistic assumptions about future trading).
It is important that you are able to supply the necessary information to the lender
assessing your request. Remember, every funding proposal will have its own unique
features. Therefore, you should seek professional advice from your accountant or
business adviser about the best way to organize funding.
Starting your research
Early research of potential businesses could include:
● scouting the location
● researching your competition (what do they offer that is different)
● checking the business's website and marketing materials
● trying the business's products or services
● checking demographics
● finding out why the business is for sale
● talking to the business's suppliers
● talking to the business's customers
● researching customer reviews about the business online
● performing a credit and historical search on the business's legal structure and/or
its owners/directors
● researching industry and market trends.
3.2.4 Conducting due diligence
When buying an established business, it is vital that you, the prospective business
owner, examine the business in detail. This process is known as due diligence. Due
diligence is generally conducted after the buyer and seller have agreed in principle to a
deal, but before a binding contract is signed.
Conducting due diligence is the best way for you to assess the value of a business and
the risks associated with buying it. Due diligence gives you access to important and
confidential information about a business, often within a time period specified in a letter
of intent.
With this information you can assess the business's financial position and identify risks
and ongoing potential. It is your chance to answer any questions you might have about
the business.
The due diligence process ensures that you get good value for a business. Done
correctly, it can be the difference between buying a business that makes you money and
buying a business that costs you money. You should always perform due diligence with
the help of your lawyer, accountant or business adviser.
Investigating a business

To conduct due diligence you'll need to carefully review:

● income statements
● records of accounts receivable and payable
● balance sheets and tax returns including business activity statements (last 3-5
years)
● profit and loss records (last 2-3 years)
● cash deposit and payment records, as reconciled with the accounts
● utility accounts
● bank loans and lines or letters of credit
● minutes of directors' meetings/management meetings
● audit work paper files (if available)
● the seller's claims about their business (e.g. their reasons for selling, the
business's reputation)
● privacy details (e.g. of employees, trading partners, customers)
● stock
● details about plant, equipment, fixtures, vehicles (are they in good working order
and licensed?)
● intellectual assets of the business (e.g. intellectual property, trademarks, patents)
● existing contracts with clients/staff
● partnership agreements
● lease arrangements
● details of the business's automated financial systems
● details of credit and historical searches related to the business.
You also need to value the business to check whether the asking price is fair.
Warning signs for the buyer
You should be wary of sellers who:
● do not disclose important information (e.g. their reasons for selling, financial
statements, licenses and permits, staff contracts)
● won't agree to a trial period or enough time to conduct due diligence (you will
need at least 30 days)
● won't introduce you to their suppliers, landlord or estate agent
● are involved in legal proceedings
● are keen to close the deal quickly
● have a questionable credit record and history.

3.2.5 Making an offer

After you've conducted due diligence and valued the business, it's time to begin
negotiations -usually with professional support and business advice. Negotiating the
purchase of a business involves making an offer, which is usually followed by the
seller's counter offer and bargaining to reach an agreement.
Negotiation tips
● Know your limit (the highest price you're prepared to pay for the business) and
stick to it.
● Never agree to the first price quoted. Remember that the seller's first price is a
starting point. It's probably useful only because it gives you an idea of whether
the business is within your price range.
● Open negotiation at the lowest price possible (but make sure it's reasonable and
you're able to substantiate it). If you offer half the asking price, the seller may not
think you're a serious buyer.
● Always take your time during negotiation. You're buying a business that may well
be your principal activity for many years. An extra few days or weeks are worth
investing to ensure you purchase the right business for you.
● Make your own list of items for negotiation, placing them in separate categories
based on what you can compromise on (nice to have) and what you can't (must
have).
● Challenge the seller by asking 'what if' questions. What if a major client goes
bankrupt?
What if a key group of employees leaves with the changeover?
● Do not reveal your own reasons for buying or how badly you want the business.
If you really want it, you'll probably end up making more concessions to get it or
paying more for it anyway.
● Avoid being overly critical and confrontational. Keep the conversation focused on
facts.
● Practise the negotiation with a friend or relative beforehand (role play).
● Make sure you're satisfied with the outcome. The product of successful
negotiation is both parties satisfied with the end result. But if only one party is
satisfied, make sure that party is you.Be prepared to strike a deal if you're
comfortable with the price. Be prepared to walk away if you're not
● Above all, keep emotions away from negotiations. If you can't do that, ask your
professional adviser to negotiate on your behalf.
Bargaining
Buyers and sellers often enter into negotiations from what's sometimes called a
'positional bargaining' standpoint. Since both parties want to achieve the best outcome
for themselves, the seller's interests will be different from your interests.
 ● The seller's interests will include wanting to make as much money as possible on
the sale of the business, attending to the sale transaction in the way that's most
tax advantageous for them, severing liability ties and avoiding any contract
conditions they can't meet. Most of all, the seller wants a profit.
● Your interests will include wanting to pay the least amount possible for the
business, with the inclusion of as many tangible and intangible assets as
possible in the purchase price, favorable payment terms and warranty protection
against false claims from the seller. Most of all, you want a bargain.
A shrewd bargainer would be able to convince the other party that the other party is
getting more than they're paying for or, alternatively, that they are paying less than what
the business is worth.

Business legal structure

If you're satisfied with the due diligence report, have the necessary finance available
and are ready to sign the contract, you must consider how to structure the purchase.
The most common structures include:
● sole trader
● partnership
● company
● trust.
The structure you choose must be defined by key considerations, including:
● financial risk of the business
● personal financial exposure
● requirements from outside partners or investors
● expansion plans
● federal and state tax efficiency.
It is very important that you decide on the correct legal structure for your business
before you sign the contract. Asset transfers attract taxes, such as stamp duties and
capital gains. Make sure you don‟t need to re-structure your business soon after you
have signed the contract, as this will attract unwanted taxes and additional professional
fees. Seek professional advicebefore deciding on the ideal structure.
3.2.6 Drafting a purchase contract
After you and the seller have agreed on a price for the business and what the price
covers, you'll usually draw up a contract to give legal force to your agreement. A written
contract ensures that both parties clearly understand what each is agreeing to provide,
for what cost and for what method of payment.
You should consult a legal adviser and accountant for advice on the tax and legal
implications the transaction has for you.
Types of purchase contracts
There are basically 2 types of contracts:
● purchase contract for the assets of a business (i.e. you purchase only specific
assets that the business currently owns)
● purchase contract for shares in the business (i.e. you purchase all the shares in
the business and, so, take over all its assets and liabilities).
Before deciding whether to buy shares or assets consider the following:
● When you buy assets, it is relatively easy to establish whether the assets are
unencumbered and that you are not inheriting any potential liabilities that may be
associated with the sellers past history (e.g. pending legal action, tax disputes,
overdue creditors)
● When you buy shares in an existing company, you are exposed to all outstanding
claims against the company in which you will own equity. Even if the seller
agrees to provide legal indemnities, you may be exposed to unexpected claims.
Make sure you seek professional advice before you sign the contract.
What to include in the purchase contract?
Price
This will usually be a break-up of the purchase price, allocating specific amounts to
goodwill, plant, equipment, stock, etc. You should seek accounting advice regarding
allocations of assets, as this has serious taxation implications. You should determine
exactly what aspects of the business you're interested in buying. For example, the
business manufactures an item and sells it in a store. You'd need to determine if you
want to buy both parts of the business.
Type of purchase
You need to determine if you want to make an offer for the business's assets, its shares,
or both.
Payment method
What you will pay, how and when.

Seller's involvement after purchase

This might include providing you with training so you can continue operations in a
seamless manner.
Restraint of trade covenant
This protects you from loss of business through the seller's opening of a competing
business within a reasonable proximity.
Any other conditions
This might include the things you and the seller each agree to do before settlement, and
arrangements for current employees.
In addition to the basics of price and purchase, contracts should address contingencies
such as:
● whether the purchase is subject to finance approval by a bank or other financial
institution
● your defaulting on installment payments
● the seller providing inaccurate or false financial information
● the seller having more liabilities than were known at the time of purchase
● the seller not owning some of the claimed assets
● material changes in the business occurring before the transaction is closed
● the seller opening a competing business in a location too close to the business
they've just sold you.
Most of these provisions work to protect you, the buyer, since the seller knows what
they're selling and the amount to be received. You'll want to limit your risks as much as
the seller is prepared to allow.

4.0 Conclusion
In this unit, we have discussed those factors which affect the location of projects. The
projects may be private or public sector projects. The factors may be economic or in
some cases be political.
5.0 Summary
In this unit, we have discussed those factors that affect the location of projects. They
range from market driven forces to political forces. We have also discussed intervention
projects which are a new feature in our economy.
6.0 References/Further Readings
Leon Ikpe (1999). Project Analysis and Evaluation. Lagos: Impressed Publishers.