Buy a Business with Real Estate

BUYERS - DON’T BUY A BUSINESS WITHOUT THE REAL ESTATE - AND BROKERS - IF YOU ARE REPRESENTING YOUR BUYER CLIENT, CONSIDER SHOWING HIM ONLY BUSINESSES WITH REAL ESTATE. AND HERE’S SOME REASONS WHY:

1. There is a usually a termination to every lease and that puts the business in peril even if forced to move a half block away. A three year lease is unacceptable and a five year lease evaporates before ones eyes as the business is just beginning to generate some real positive cash flow but is now forced to negotiate a new lease or find another home. Admittedly, some businesses are less sales-loss sensitive than others i. e. a distribution business vs. a café. But why even put yourself in that position?
   
   
2. When a business has the real estate embedded in the balance sheet it is often under valued in a stock deal. Pulling it out of the balance sheet could be a taxable event in bringing it up to market value, so most Sellers unwittingly leave it alone to avoid taxes.
   
   
3. Buying a business with real estate often is the only way that lenders could do some deals with a Seller’s antiquated equipment and questionable discretionary cash flow. It may be the ‘saving grace’ of the transaction. At least the lender would have a definable asset with some tangible value to enable the deal.
   
   
4. Consider pulling the real estate out of the deal after Closing into an LLC, establish a market value for the real estate asset and have your attorney generate a ‘market lease’ with your own business as the tenant and a single five year lease with (2) three year options with considerable ‘bumps’ in-between. After all, the Buyer’s plan should be to sell the business in at least seven years, retain the real estate for part of his retirement and do this for three or four transactions. In short, Buyers, don’t fall in love with your business - build it up, call your business broker and sell it. Much too dicey out there to consider running it to perpetuity. Remember, it’s all about real estate! The business and building may go functionally obsolete but you always have the ‘land’ and to paraphrase Will Rodgers, “they don’t make much more of it”.
   
   
5. I’ve had Buyers who budget their salary, living only off the real estate corporation’s revenue stream enjoying the valuable income tax offsets i. e. amortization, interest, depreciation, creative maintenance expenses, etc. that the tax system provides. Bet you won’t pay significant income tax for half a decade (if you’re smart!). The business entity’s cash flow pays your perks incl. bonus, the debt service, expansion capital for future acquisitions to build your Client’s fortune (or your own). Careful, conservative reinvestment trumps conspicuous consumption!