In most cases, if you’re considering buying a business, there’s some amount of real estate that’s included in the purchase. Whether it’s a physical storefront, a restaurant, or a mechanic’s shop, there’s one or more buildings, some land, parking lots, and more included.
For a prospective business owner whose goal is to find and purchase a business that’s going to be profitable, this may be a secondary consideration that falls under the “too obvious to think about” category. But more experienced real estate investors realize that attitude can be extremely dangerous, since there’s so much potential for loss involved in purchasing real estate without taking the necessary precautions and doing your due diligence up front.
So, consider this brief article a caution to prospective business buyers who don’t have real estate investing experience, and a suggested target market for savvy real estate investors who already know how to pick the diamonds in the rough.
Get advice from a pro
The first tip should be a no-brainer, but again, business buyers with little or no experience may not think it matters that much.
If you’re seriously considering buying a business, you’re likely already working with a lawyer, an accountant, and possibly even a business broker to make sure you navigate this potentially complex transaction effectively and have the best chance of success when it’s done. Although all these pros are likely very knowledgeable and want to help, they’re not likely experts in the local commercial real estate market.
That’s why it’s always best to bring on an experienced commercial realtor who’s familiar with the local market to ensure that the real estate portion of the business transaction is handled effectively and that the eventual agreement is in the buyer’s best interests.
As a real estate investor, this point highlights the value of establishing relationships with the local commercial realtors in the areas where you wish to invest. That way, if they advise a prospective buyers that a particular commercial property they’re considering isn’t right for them, the realtor can offer your inclusion in the transaction as an alternative to walking away completely. This puts you in an excellent position to obtain a commercial property at a discount, since you’ll be “saving the sale”, which has value for the current owner.
Is the property’s value in line with the business’s asking price?
Prospective business buyers will generally spend a lot of time and attention on business valuation – determining how much the business they’re considering buying is actually worth, using any of several different methods that rely heavily on past sales performance and other details from the business records.
However, the physical value of the real estate involved in the transaction could be a secondary consideration.
Again, an experienced commercial real estate professional can be very helpful in determining exactly what a specific property is worth – separate from the business being conducted there. Factoring this information into the business valuation can go a long way toward either proving the value (or lack thereof) in a given sales agreement.
This can again turn into a situation where a real estate investor can assist, since they may very well be able to get value out of the property itself without needing to include the business being done there, which would free up the prospective business buyer to pay less for the business itself, and then move it to a different physical location that better suits their future needs.
Is the property fully compliant with all applicable regulations up-to-date on inspections?
A prospective business buyer who overlooks this seemingly small detail can find themselves in over their heads after they’ve signed on the dotted line.
While maintaining compliance to necessary regulations, licensing, inspections, and the like is a normal part of doing business, bringing a non-compliant property up to snuff can be an expensive and time-consuming proposition. It’s even more stressful if it comes as a surprise after you’ve just spent good money to purchase the property with no idea the further investment would be necessary.
Since the business buyer is generally going to be more interested in hitting the ground running preparing the business to start generating revenue as soon as possible, they’re unlikely to bite on a rundown property unless the price is a huge bargain. A real estate investor, on the other hand, may have more flexibility in being able to take on a rehab project and still make the property profitable in the long run.
Is the property in the right location to thrive containing that kind of business?
This final tip falls under the question every prospective buyer should be asking the business owner:
Why did you decide to sell?
Often, they’re selling due to personal reasons: they’re looking to retire, they’re dealing with health issues or life changes, or they’re looking to move on to new opportunities.
But, in other cases, they’re selling because the business is no longer viable or is failing to make an adequate profit. That could potentially have something to do with the property itself, in which case the buyer will need to take that into consideration when deciding if they want to purchase the whole package or consider just buying the business and allowing a separate investor to come in to purchase the property.
For example, if the business relies on traffic – like a car wash or a fast food restaurant – and a recent freeway interchange construction project has drastically reduced the amount of through traffic driving past that property, it could have a huge impact on revenue. However, from the real estate investor’s perspective, the property could still have excellent value if used for a different purpose. This could be another excellent opportunity for the business buyer and real estate investor to approach the deal together to create an optimal transaction.
In all cases, the moral of the story is this:
Don’t overlook the physical property in which a business is housed if you’re considering purchasing the business. It’s a huge aspect of how successful that business is going to end up being. And, if you’re a real estate investor that works with commercial real estate, consider making yourself available to commercial real estate agents and business brokers to let them know you’re interested in assisting when a purchase is threatened because the property isn’t ideal for the new owner.
Bruce Hakutizwi is the U.S. and international manager of BusinessesForSale.com, a global online marketplace for buying and selling small businesses.