Allen C. Buchanan, Principal, Lee and Associates #CRE. Complete commercial real estate location advice for owners and occupants of manufacturing, flex, and distribution buildings in Southern California. (714) 624-3896 firstname.lastname@example.org, www.allencbuchanan.com/blog
Friday, February 3, 2017
Can Commercial Real Estate Affect your Company's VALUE?
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.
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.
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.