Leasing your business location is certainly economical to start. With very little initial capital cost, you can gain use of the asset and experience many of the benefits.
However, once your business grows, purchasing your location not only becomes economical, but can be extremely beneficial to your overall bottom line.
The Bottomline Math — Cash-Flow Analysis
A classic cash flow analysis shows the amount of cash needed on hand to cover the costs of the business and location. To make a determination based on this method, you need the items below, and you will probably have to make some assumptions:
Purchasing Information
- Price
- Terms
- Closing Cost
- Depreciation Capabilities of Location
- Capital Cost for Project
- Other Cost Incurred by Purchasing
- Income Opportunities from Other Tenants, if any
- Estimated Appreciation of Property Value
Lease Information
- Lease cost
- Lease terms (including other cost such as maintenance, taxes, insurance, etc.)
- Capital Cost for Project
Once you have these numbers, begin to compare the expenses versus income and carry the figures out several years. As you analyze the information, you will find a point where the cost of buying equals the cost of leasing long term.
Depending on price and terms, this should give you a good estimate on how long it would take to be “worth it” to own. In my experience, a good rule of thumb is usually somewhere around 10 years. This would mean that on year 11, if you have purchased the location, you are making money. If you are leasing the location, you are losing money. Visit with your accountant or CPA to determine what other savings may be available in the tax code — such as starting a property holding company and leasing the location from yourself, tax benefits from interest on the note, tax benefits and write offs from leasing, etc.
Buying costs much more up front than leasing. Typically the down payment on a commercial property could be from 10 percent to 30 percent or more. If you are just starting out, this sizable down payment would be valuable capital for your business that you could use to grow your startup. However, you should also calculate the difference in lease payments versus potential mortgage payments. The lease is usually higher. That monthly out flow is also a lost opportunity cost.
Impact of Real Estate Attached
One little known benefit of property ownership is that real estate improves your exit strategy!
Businesses selling with the real estate have far better success rates. Connor Grimes of CBI Sunbelt Business Advisors noted that buyers are looking to purchase an income. They want a minimum of $50,000 to $75,000 of Sellers’ Discretionary Earnings. The hardest part about selling a small business is finding a buyer capable of lending the money necessary to purchase.
These days, securing a bank loan to purchase a business is rare. Most of the time, the buyer uses a combination of personal finances, personal loans and owner financing. The gap between the value of the assets (real estate, furniture, fixtures, equipment and inventory) and the “value” of the business is often referred to as “blue sky.” Much of the “blue sky” value (although real) is owner financed. A bank is more likely to provide a loan to the buyer to purchase a business when real estate is attached. This lowers the amount of money necessary for the current owner to finance, closing the “blue sky” gap.
Some rough rules of thumb: If you are an established business, looking for a suitable location that can grow with you and service you well, you want to be there for about 10 years and have the cash flow for the down payment and other monthly expenses, you should strongly consider purchasing the location for your business.
Now, all you have to do is choose the right location, and well, that is an entirely different article.
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