Friday, February 3, 2017

Can Commercial Real Estate Affect your Company's VALUE?

Image Attribution: www.kerrypostel.com
In a word, YES! But since it’s a New Year and I've a few more words, let's examine specifically how, shall we?

Your business falls into one of several broad categories – retail, manufacturing, warehouse and distribution, or service.
 
Each business has specific needs for a location – some can be managed from your home office and garage while others require thousands of square feet of commercial space from which to operate. A retail business must rely on visibility or stores nearby to attract customers.
 
Depending upon where your company falls in this spectrum, dictates your facility costs.  

One of the biggest facility costs is rent – that sum you stroke each month to yourself, if you own, or your landlord, if you lease.
 
We can layer in utilities, licensing, compliance, improvement costs, and location operating expenses such as property taxes and insurance.
 
Don't forget to add in an amount for the gardener and trash man.
 
All of these costs comprise a line item of profit reduction.

Speaking of profit, your businesses worth is a multiple of said profit. A potential buyer, of your business, will analyze the Earnings (profit) Before Interest Taxes and Amortization also known as EBITA. Then, depending upon the buyer’s appetite to acquire your business, the multiple will vary and thus the value will ebb and flow.

Generally, business buyers are either attracted to your business to expand their own – known as a strategic buyer or looking for a “value add” opportunity  – referred to as a private equity buyer. If the strategic buyer has local facilities, your commercial real estate will be viewed as a hindrance – they have space and don't need more. Conversely, a short term lease at below market rents will repel that value seeking private equity firm – because their facility costs will increase in the near term and reduce the business earnings.

Recently, I've witnessed commercial real estate crater two business sales – one a merger and the other an acquisition. In the former, a printing operation seeking a strategic partner, found resistance to the long term over market rent on their production facility. Every buyer looking to merge or acquire was faced with a costly surplus of buildings – an insurmountable challenge. In the latter example, a buyer walked away because the lease for the business was set to expire next month, the rent was half of the market rent, and the landlord was unwilling to re-write a new lease with the buyer. Boom. Deal over.