Deciding to Buy Versus Lease
When you’re opening a new business, or expanding your current one, it’s important to understand the potential risks you take on if you buy versus rent. Owning a business is a task in itself and buying in the wrong area or realizing renting would’ve been a better option after a year or two is something you don’t need to add to mix. Here are some of the potential risks a business can run into when buying:
- Location. Locations are trendy and the up and coming neighborhood today might end up stalling development or the local market may decline.
- Liquidity. A lot of a business’ liquidity can get tied up by buying real estate and it’s not always easy to sell real estate, if needed, down the road. At the same time, businesses that own real estate at least have something to sell if they need a cash influx to revive a lagging business.
- Unknown cash flow. Tenants can sometimes stop paying their rent, especially if the business is in trouble. As a building owner, you also need to prepare for the unexpected, usually costly repairs.
Make sure you do your research before purchasing a property. The best way to make sure your decision was the right one is to be hands-on with your commercial property by overseeing every level of operation and making frequent on-site visits.
Assemble a Team of Experts
As a business owner, it’s imperative to have a team of experts to make sure your commercial business purchase goes smoothly. They can help you determine the right time to buy or sell, the right locations to consider, and be with you every step of the way through closing. Here are some of the experts you may want on your team:
- Accountant. An accountant can help you determine your business’ expenses and help you decide what you’re able to afford.
- Lawyer. A lawyer can assist in the transaction, and negotiate with the seller and lender on your behalf.
- Commercial broker. A real estate broker can help you narrow down your search and give you different options based on your budget.
- Mortgage broker. A lender or mortgage broker will help you determine the best financing option for you.
Identify the Right Property
“Location, location, location” is the phrase all buyers, home or commercial, hear from their real estate agents and that is the major factor that can make or break a business. There are other factors that you should consider when you’re searching for the perfect property.
- Location. You want to be convenient and close to customers to the extent that your customer comes to you. Being easily accessible via public transportation or having a parking area for those driving will keep your customers coming back again and again.
- Physical condition. Consider the wear-and-tear the property has, potential liability issues and alterations that will need to get done to get the property in workable condition.
- Allowable uses. Check with local zoning laws to make sure the property you’re looking at is right for your type of business.
- Limitations on exterior and interior. There may be limits to the changes or alterations you are able to make to the property.
Do Due Diligence and Evaluate the Property
After you locate the right property and go to contract revisit your objectives, and ask yourself if the property you have identified helps you meet your objectives.
Your team of experts can also help you in evaluating the property. A broker can bring in engineers, appraisers, environmental analysts to help verify the condition of the property, its prior use, and any potential liability issues. A title company can also make sure there are no prior or existing litigation or insurance claims that affect the property.
If you find any problems, you might want to consider renegotiating with the seller or even walk away from the deal if your needs aren’t met.
Making the Purchase
Once you’ve found the right property and negotiated with the owner, the next step is to secure financing and decide how much you have as a down payment so you can determine the amount you will need to finance.
During good economic times, there are an abundance of attractive financing options available to small and mid-sized businesses, however, durng tough economic times, it’s important to make sure your business has sufficient cash reserves, good credit, and is profitable as loans are harder to obtain.
Your attorney and accountant will ensure that your contracts are detailed, and structured to your maximum advantage. You need to envision every possible contingency, and make sure it is covered in the contract.
Once the purchase takes place, it is imperative that you implement and execute your business plan with any additional specifics added to it during this step. “Time is money” is very true when you’re renovating or building a commercial property.