Buying a Business: Deciding Whether to Buy the Commercial Real Estate

One of the key decisions faced when buying a business is whether to buy the commercial property associated with it. For investors presented with this option, there are certain advantages and disadvantages that come along with owning commercial property that should be considered.

To help you work out whether to use the old property or move operations somewhere else, we have put together this series of questions that you should ask yourself as part of the decision-making process.
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Is it financially viable? `

Undertaking the purchase of a business involves a significant financial outlay. Assuming ownership of the building in which it is based can see overall costs increase significantly. You will be saddled with mortgage payments, extra insurance costs and the costs associated with maintenance. If you are already pulling out all the stops to gather together the money to afford the buyer’s selling price, it may not be financially viable to acquire the commercial property as well.

However, if you are keen to keep the business in the same physical location, it may be a better option to work out a rent-to-own deal with the seller for the short term. You may then be able to agree a deal to buy the property once you have set up and started making a profit from the business.

What would the advantages/disadvantages be to the business?

It is understandable to be cautious about committing to a rental contract immediately after assuming control of a business. It may be an attractive option to buy the commercial property associated with the business outright, but you should ask yourself a few questions first. You will need to work out whether the property will improve your future growth prospects. There may also be some opportunities for income derived from rentals that may be beneficial and provide you with an alternative source of income that you can funnel back into the business.

Can the business survive without the building?

The building in which the business is currently based has probably undergone specific modifications to help the business work more efficiently. If this is the case, moving to a new property may pose significant issues since some landlords are reluctant to permit drastic makeovers due to fears that it may damage rental prospects should you decide to move to a new property further down the road. Other landlords may be fine with such a makeover, but will look for an increased rate for letting it go ahead.

If your business requires a customized space in which to operate, then purchasing the property the business is based in may make sense. Moreover, you might use the fact that the building will not have to be renovated as a bargaining chip with the landlord if you are assuming control of a business that currently occupies a rented space.

Another factor is customer traffic: relocation might not be an option for retail operations that obtain a significant portion of revenue from walk-in traffic, or for businesses, where a new location would be inconvenient to its customers

Will it be possible to rent some of the space to a third-party?

As mentioned previously, one potential benefit of purchasing commercial real estate currently occupied by the business is that you may be able to generate rental income by leasing space to other businesses. However, you should only do this if you are willing to deal with the responsibilities and complications of becoming a landlord yourself. While the prospect of increased revenue is attractive, you should make allowances for the fact that outgoings will also increase with insurance and maintenance costs.

When acquiring a new business, you should carefully consider whether buying the building in which it is based is a shrewd business move. Into your decision, you should factor in your current financial situation, motivation for buying the property and whether or not you are ready to assume the extra challenges of owning a commercial space.