“Reaching that decision to buy is very exciting, because it signals that the business is growing and is healthy,” says Robertson. “However, the decision to buy has to be a good one or it can hinder — or even harm — future business growth.”
Smart Business spoke with Robertson about the advantages and disadvantages of buying versus leasing and some common mistakes businesses make when purchasing a commercial property.
What are the advantages of purchasing a commercial property for a growing business?
Buying a building gives a company the opportunity to reap the benefits of real estate appreciation, building equity, and cash and funding for the future. When there is a long-term mortgage, a business can pretty much count on that cost being fixed and forget about rising lease costs. There is also an opportunity for income if the building is large enough and space can be leased out to other businesses.
While these are very compelling advantages, what are the disadvantages?
Many business owners don’t realize this, but purchasing a building throws you into another business: real estate. Real estate is a business venture that requires working capital, such as the down payment for starters, and it requires a lot of time and effort as well. The money, the time, the focus it takes to complete a real estate transaction can take a business owner away from the primary business. After the transaction is completed, the upkeep, maintenance and regulatory requirements can be quite intense in the 12 to 18 months of ownership. This intensity is minimized over time, but business owners need to be prepared to shift their focus from their primary business to this real estate business during this time.
Is there anything a business owner can do to prepare for entering the real estate business that will minimize the impact on the primary business?
Yes. The business owner needs to ask the following fundamental questions, and answer them honestly.
- Am I ready to put in the money, time and specialized knowledge to buy a commercial property?
- Do I have the current working capital to support not only the down payment, but unexpected costs such as a new roof, new furnace or code changes?
- Will my primary business suffer because of the time and money that I, or staff members, will devote to this real estate venture? For example, if I devote 60 days to purchasing this property, will my business miss customers, sales and opportunities?
What are the biggest mistakes business owners make when entering into a real estate transaction?
The No. 1 mistake is stretching working capital too thinly. Business owners will often use most of the businesses’ cash in the real estate deal, and while most think that the money will be recouped, it is often difficult. When too much working capital gets tied up in the building, or the business owner’s time gets taken away from the primary business enough to harm sales, it can ultimately sink the business. Cash flow and financial reserves have to come before the building purchase.
Business owners need to be careful that they will have working capital to support the fundamental business; that is, the money to buy a building needs to be over and above the working capital needed to support the primary business. The goal is to preserve the cash flow and the profitability of the primary business at all cost, and real estate acquisition is secondary.
More often than not, business owners find that buying their building is one of the best investments they can make for their business. But, we also like to see businesses do this wisely.