Leasing, business values, owning your own location

I guess most of you know from my posts over the years that I started and have owned my delco for going on 12 years and my wife and I also own a specialy retail store but that what I do for a living is business brokerage, commercial property sales and leasing.

For the last 6 weeks and over the next couple of months, I will be adding “Certified Business Appraiser” to my credentials. It has been an interesting process since I have been so close to small business. On the one hand, a business (or anything else for that matter) is worth what a willing and able seller and buyer can agree on and appraisal is intended to forecast that result. On the other hand, we have all seen examples of businesses that sold for silly numbers both too low due to lack of a buyer or financing or too high due an emotional, irrational or uninformed purchase.

That these oddball transactions take place does not change the fact that there are some pretty solid foundations for the value of a business. We see desperate sellers on the board from time to time, dreaming newbies or first timers, people who seem to have pulled a bunny out of a hat and opened or purchased for amazingly low prices or outrageously high ones.

Without seeing those operations, none of us really knows whether we are talking about 1st class buildout, location and equipment poised for 7 figure sales or yet another “midnight autoparts” version of the pizza business that gives the industry its sketchy reputation with lenders and vendors.

If you are looking to buy, sell, lease etc, get some professional advice! Contact a qualified person in your area. Take what you read on these forums with a grain of salt. Some of what is posted is great information, some of it is BS, some of it is just wrong.

Most advice is worth what you paid for it and ALL education is expensive!

Very well said. Thanks Steve.

I heard a story on CBC Radio the other day about equity to retire…The commentator said that homeowners and folks in business today were not creating a nest egg like folks before them because in the case of home owners they were renting too long before they bought and in the case of business owner many more were leasing versus buying their buildings…In Canada large investment companies and insurance companies were growing their equity at a much higher space than other sectors because they were increasing their holdings of rental properties…

I would have to agree. Over time, owning your premises is the most reliable way to build value. Even if the montly nut is higher at first than the rent, there is no question that 5-10-20 years out you will be far ahead of the game to own vs rent.

When your building is for sale, you have to move on it then even if that is not the ideal time for you to do so.

One challenge is that you have to get far enough ahead of the game to make the down payment. Conventional financing right now will require about 20% down in most cases and that is not easy to come up with some times. SBA is a little easier, but with more debt comes a higher payment. Some ideas to get around that issue:

  1. Seller financing. A seller may be willing to take back a 2nd so that the bank is comfortable with the security they have in the property but you do not need to come up with so much $$ initially. Perhaps you come up with 5%, Seller carries 20% and the bank loans 75%. The seller will want a higher interest rate than the bank because they are in 2nd place with a higher risk of default. The deals I see are in the 7-9% range for this kind of thing.

Another form of seller financing is 100% seller financed. Again, higher interest than a bank, but perhaps possible when no other options exist. Pay a higher rate for perhaps five years until you have enough equity to re-finance with a bank without having to come up with so much $$.

  1. A partner in the real estate. People may be more willing to consider partnership in the building rather than the business. Form a LLC to buy the building and have the business rent it at a fair market rate. A partner assists with the down and receives a portion of the ownership of the building. Establish a buy-out agreement that lets you take the partner out of the building later when you can afford to do so. You have to give the partner a nice return on the money they invest, but you end up owning your building when you otherwise would not be able to do so.