Purchasing a business can be complicated process, especially for first timers. When this transaction includes real estate, things can get even more complex.
While some think that it is a good idea to own the land beneath one’s business, there are an equal amount of reasons why this might be a bad idea for the business owner.
Leasing during the start up phase of a business just makes sense
The vast majority of business owners lease space for their business. Doing so gives them the flexibility to move whenever they feel the need, and it frees up capital that is crucial for the growth of their start-up.
Despite what many pundits say, real estate is frequently a liability rather than an asset. Real estate booms are usually a short-lived phenomenon; the rest of the time, prices go up very slowly, and maintenance and repair bills associated with property ownership can chip away at a company’s fragile bottom line. For these reasons, we recommend leasing during the early years of a business.
When does it make sense to purchase real estate for a business?
There are circumstances when it does make sense to purchase real estate for a business. Acquire property when:
(1) There is a need to lock down a certain location
Certain types of businesses need to be situated in certain parts of a town or city in order to succeed. If an entrepreneur wants to get into the boutique jewelry business, they would do well to locate themselves in a prime shopping district.
In situations where vacancies are scarce, a successful business owner might want to consider purchasing real estate for their business to avoid having to open their business in unsuitable locations, such as high crime neighborhoods or industrial parks.
(2) Controlling other tenants in the building is a top priority
When space is leased for a business, the business owner will often have no control over other tenants that take up residence in the building.
It may not be desirable to have businesses such as a smelly sandwich shop set up next door if the business owner in question deals in high-value clothing that sells for thousands of dollars a piece.
If a business owner has sufficient capital or financing at their disposal, then purchasing an entire building in order to control who rents out the other stalls might be a gamble worth taking.
Appraise the value of real estate apart from assets of the business
When a business owner with real estate puts their company up for sale, they will often lump the value of their property together with that of their business assets. When this situation occurs, it is prudent to appraise the value of business assets apart from the value of the property.
While this can be a time-consuming process, the extra effort taken will protect the buyer from paying a price that is out of line with what the property and the business is actually worth.