Buying a Business
Understanding the process
There a number of great reasons where it makes sense to buy an existing business rather than start one from scratch (immediate cash flow, established lease, suppliers, staff etc.)
That being said, buying a business comes with its own set of challenges, so make sure you do some research into financing, industry and government regulations.
Research the business
The first thing you should do when you find a suitable business to buy, it to verify the state of the business.
Some of the questions you should be looking to answer include:
- Why is the vendor selling?
- What does the sale history look like and are there any trends you can see?
- Is the business profitable?
- What are the fixed and variable costs of running the business?
- What assets and inventory will be included in the purchase of the business, and are there any leasing or intellectual property arrangements in place?
- Does the business have any outstanding debts? What other liabilities will you be taking on (for example, will you need to cover refunds and warranties from the previous owner?)
Establish your credibility
Make sure you go about registering your interest in the business the right way. The owner will usually have instructed a business broker etc, to sell the business on their behalf. Approach them rather than the owner, to register your interest. Your integrity and your future plans for the business are usually extremely important to the seller.
Goodwill is an important part of buying an existing business, this includes things like having an established brand, loyal customers, high profit, quality staff, good location, long lease and supportive suppliers.
Get advice from your accountant on the most favourable way to deal with goodwill and how much value it brings to the business.
Pay it off if you can
Most sellers will want to be paid in a lump sum, in which case you may need to look into securing business loans and finance. However, often the seller often will have to leave some money in the business to help finance the deal. Consider asking the seller if you can pay off the business over a period of time rather than in a lump sum. This way you can pay off the business using cash generated from the business itself. It’s also a strong indicator of how confident the owner is that their business will be able to fund repayments from cash flow.
Buying commercial/industrial real estate
There are 3 main types of commercial properties: office, retail and industrial. Here is what you need to know about each of them before investing:
Offices are generally considered the safest form of commercial real estate to invest in. This is mostly because tenants tend to stay in these sorts of premises for long stretches offering greater security to investors.
Before you go ahead and invest though, you will need to consider the following:
- Appearance: Businesses like their office space to look nice. This includes the external appearance as well as the internal look of the building. The tenant is often responsible for the internal cosmetic appearance but landlords need to ensure that the building appears up to date.
- Natural lighting: Workers in most typical office buildings will spend most of their working day indoors therefore, views and natural light streaming into their space are in high demand.
- Location: Offices want to be near their customers as well as close by to other businesses, so a good location is usually key. If you’re looking to buy an office building, it’s much safer tobuy one in a sought after location.
Location is crucial to retail property (more so than office space.) It must be easily accessible and convenient for shoppers to get to.
For example, if you’re interested in buying retail property in a shopping centre, the anchor tenant (the one that occupies the largest space, often the supermarket) is key to the success of the centre.
The closer your shop is to this tenant, the more foot traffic your tenant will get, helping their business to perform better, and providing your investment with better long term security.
When it comes to returns, industrial property is the most volatile. But higher risk means potentially more reward.
Heres what you need to consider before jumping in head first.
Higher rent = higher yield
One of the attractive aspects of investing in industrial property is the higher rental incomes and yields (the annual return on investment) they offer.
Industrial property is usually valued in relation to the square metres available and can offer yields of 8%, compared to say just 4%-5% on a house.
Industrial tenants will be more inclined to sign longer leases (up to 10 years in some cases) providing you with greater security than you would typically get.
Tenants pay most outgoings
Most industrial leases are net leases. This means the tenant pays for costs that would normally be paid by the owner such as insurance, utilities, maintenance and repair costs.
You will find that most tenants of industrial buildings will maintain the building to a high standard, as the appearance reflects on their business, meaning less maintenance for you, as the tenant is likely to attend to any maintenance issues quickly themselves.
The risk of vacancy is much higher for industrial properties as they are more vulnerable to changing market conditions than residential property. If a business closes and during an economic downturn, it can take a long time to find a new client. Investors should be prepared for long periods of vacancy.
Banks view industrial real estate as a riskier investment than residential, so the cost of borrowing is higher. They will usually also demand a bigger deposit (around 30%) and interest rates will often be higher than for a loan for a residential property.
The industrial sector is constantly changing. This means industrial buildings can quickly become obsolete.
Even the location can become undesirable if road tolls are introduced nearby or betterlocated logistics spaces open up.
The key here is flexibility and location. The more flexible and better located the space, the more attractive it will be to businesses.
Other things to consider
Location of industrial property isn’t as important as it is for other forms of commercial real estate, but you will need to consider access.
- Is the premise close to major roads?
- Is it easily accessible for trucks and semi-trailers?
- Is the roof high enough to accommodate forks-lifts, and are the doorways large enough for trucks and other heavy machinery?
- What amenities will the staff have access to (toilets, kitchen, office space etc)