Question: We are out of room. We need to decide if we”™re going to stay here or move. Staying means picking up additional space, which I think is going to be expensive. Our other option would be to buy or lease someplace else. What should I do?
Thoughts of the day: Buying a building is often a good idea if you can afford it. Know your company”™s long-term plans before you decide what to do next. Moving a business takes planning. If you can”™t afford to buy now, work on a three- to five-year plan to get where you want to go.
Most privately held businesses don”™t have enough tangible equity. When owners need leverage, they often can”™t get the financing they need because there isn”™t enough in real asset value available in the company. And given the slow housing market, many business owners are also struggling to prove they have equity at home that they can lend back into the business in case of need.
Financing is based on comparing debt and equity. Banks are looking for more than historical net income performance. They want to see that the business has access to cash and accounts receivable net of accounts payable and credit card balances. More than 70 percent of today”™s economy is composed of service-based businesses. Their primary assets, personnel, aren”™t valued on the balance sheet.
Buying a building is one of the few purchases a company can make where the cash laid out immediately turns into additional value on the balance sheet ”” 20 percent cash down turns into 20 percent additional value on the balance sheet, if not more. Any money spent to improve the building yields an increase in the value of the asset, often a multiple of what was spent.
Before jumping on board with a plan to buy a building, make sure you know what your company”™s plans are for the mid and long term.
How much space will your company need in three to five years? Does the space you”™re looking at have expansion ability, either because you can remove existing tenants, you can build out or you can rearrange the space to fit in more?
Planning to sell the business in the next couple years? What are the chances the future owner will want to stay in the current space? Can your space be leased to someone else if the new owner moves out?
Is the neighborhood safe for your staff to come and go at all hours? Enough parking to accommodate everyone? How convenient is transportation? Will employees follow the move to the new location?
Will the building likely appreciate in value over the next 5-plus years? Are you prepared to hire a property manager or similar? How much space are you planning on renting out? How much in the way of building improvements has to be done within the first year in order to bring the building up to your standards?
Do you have enough money to pay 20 percent down? If not, where are you going to get that money from? How long will it take you to assemble the down payment?
Not sure you have the funds right now? Check to see if there are funds available from the state to help. Move or stay where you are and add a space nearby to solve short-term needs. Often, moving accounting or sales to a new location can fix the immediate space crunch and buy you some time.
Think of building assets as job No. 1 for yourself as business owner. Use the business as a vehicle for building those assets. If you have to pay rent anyway, you might as well pay yourself while you get the appreciation and depreciation value of a building.
Looking for a good book? Try “Confessions of a Real Estate Entrepreneur: What It Takes to Win in High-Stakes Commercial Real Estate” by John A. Randel.
Andi Gray is president of Strategy Leaders Inc., strategyleaders.com, a business-consulting firm that specializes in helping entrepreneurial firms grow. She can be reached by phone at 877-238-3535. Do you have a question for Andi? Send it via email to AskAndi@strategyleaders. Visit AskAndi.com for an entire library of Ask Andi articles.
