Diving deeper: When to (and not to) Consider Purchasing the Company Facility

In my earlier topic, I covered some key questions for business owners to ask themselves, whether buying the company facility makes sense: “Top Reasons to (and not to) Consider Owning the Company Facility”. In this segment, we will dive deeper into a few of the top reasons to (and not to) consider purchasing the company facility.??

You Have at Least 7-10 Years Remaining in Your Business

If you think you’ll have less than 7-10 years in business, you may want to think twice about buying. Real estate is a non-liquid asset, and transaction costs are high. If you plan to retire or exit the business within 1-10 years, timing the real estate cycle becomes critical—and it’s something you don’t want to rely on being in your favor. On the other hand, if you will be in business and own the real estate for more than 10 years, it matters much less if you happen to buy at the top of the market. Over a 10+ year period, the benefits of ownership often outweigh the impact of market timing.

Your CPA Tells You It's a Good Idea

You might be excited about buying a building, and your friends may tell you it’s a great idea, but if your CPA advises against it, you should listen. Conversely, your CPA should tell you if you're in the “sweet spot” for ownership. Interestingly, some CPAs are indifferent on the matter, while others are enthusiastic supporters. What can’t be denied is that for many, owning real estate has proven to be a great long-term wealth-building strategy—provided it makes good business sense.

Business Value May Disappear Upon Retirement or Unexpected Events

If you retire or (God forbid) get hit by a bus, the value of your business may walk out the door. For many businesses, there is enterprise value at the time of transition to a successor. However, for others, there may be no value at exit, and some owners can’t even give their businesses away. In such cases, it can be an attractive long-term wealth-building strategy to own an asset (the facility) that has been building value, and is often owned free and clear after 15+ years of operation. This property can become a great source of passive income, either through leasing it to the business successor or an unrelated tenant.

The Occupancy Cost to Own is Equal to or Less Than Leasing

To figure out your occupancy costs under both scenarios, your broker or banker can help run the numbers. While cash flow and debt servicing are important, the key is understanding the after-tax costs in each case. This will give you a more complete picture of the effective cost of owning versus leasing.

Fixing Your Occupancy Costs for 20-25 Years

If you lease, do you know what your rent will be when your lease is up? It’s usually set to fair market value, even if renewal options are pre-negotiated. Would it be a competitive advantage if you could more accurately forecast your occupancy costs beyond the typical 5-7 year lease term? With a loan amortized over 20-25 years, you can do just that, allowing for better long-term planning.

Amortizing Expensive Improvements Over a Longer Period

If you’re a manufacturer or have specialized improvements (e.g., a dentist), the cost of setting up a facility can be significant. Owning the property allows you to amortize these costs over a longer period than a typical lease term (5-7 years), which can effectively lower the cost of these improvements and increase your operational efficiency.

You Have the Necessary Down Payment

A typical down payment on an SBA loan is 10%. For some, this may be a considerable amount of capital; for others, it might be more manageable. It also depends on where you believe you can get the best return on your money. For some businesses, investing excess capital back into the company may yield higher returns. For others, there may be sufficient capital to both grow the business and allocate towards a building purchase without sacrificing growth opportunities. This is what I call the “sweet spot.”

Desire to Control Your Real Estate

For many businesses, owning a standalone facility, rather than being part of a larger business park or multi-tenant property, has numerous advantages. These may include the ability to secure the property with fencing, have outside storage, avoid shared driveways or parking, or place equipment outside. Manufacturers, construction companies, contractors, and subcontractors often benefit from these arrangements.

You Don’t Hold Investments in Other Real Estate Assets

Long-term wealth-building often includes a portfolio of diverse asset types. For many wealthy families, real estate ownership is a key part of that portfolio, offering the various benefits mentioned above.

If you are interested in discussing this with our team in greater detail, please feel free to reach out directly. I look forward to hearing from you!?