Summary: Issues to consider when confronted with an opportunity to purchase a business and the real estate on which where the business is situated.
This is a common recurring issue facing many buyers today.
Determine if the business location is crucial to the success of the business. That is, does the business rely on the location to drive sales? If so, and assuming you can afford to purchase the business and the real estate together, then you should certainly consider a purchase of the real property in lieu leasing it.
Purchasing both may facilitate financing the transaction. It is often much easier to obtain financing for the real estate compared to the business portion of the transaction. In fact, if you are going to use a third party lender, they may want you to acquire the real estate as well. The cash down payment may vary between 10 to 20 percent; however, purchasing the real estate and the business together will often enable the buyer to allocate more of the total consideration toward the real estate since there may be a built-in premium for the real estate if the business depends upon it to drive the revenue. In addition, the buyer can usually ensure a much longer loan amortization period (30 years) and obtain lower monthly payments, as compared to a (SBA) business loan (which is payable over 120 months) or seller financing (which may be further limited to 3 to 5 years). Furthermore, the interest rate on the real estate loan is usually a few points less than a business loan. Maybe the seller will consider a mortgage on the building. You can likely negotiate a minimal down payment with the seller if you offer a premium interest rate. You are usually better off paying a higher rate and getting a longer amortization which, in the long run, may lessen the impact on the cash flow of the business.
However, your primary objective is to ensure the future success of the business. Therefore, before you can consider the purchase of the real estate, you must examine the working capital demands of the business and allow for marketing, growth and expansion opportunities.
Other Considerations In the event your working capital must be allocated to building the business, then at a minimum, you must obtain a long-term lease. Furthermore, you should try to include a Right of First Refusal clause in the purchase agreement so that in the event the seller gets an offer on the building after you own the business, you can match the offer. Alternatively, you can request an option on the building with the seller that gives you the right to buy the building at a pre-determined price within the first 12, 24 or 36 months.
