Anyone have experience with acquiring Real Estate along with the Business?

October 04, 2019

by a searcher from Harvard University in Cambridge, MA, USA

If so, would love to have a quick conversation on things I need to be aware of, mistakes not to make, etc. Let me know, thanks!

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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

If they own both the business and real estate (likely in separate entities) make sure the business financials reflect a market lease rate (this adjustment may be up or down from what the business is currently paying its sister real estate company). Second, as ^redacted‌ mentions, make sure you understand which entity is paying for the other items (insurance, property tax, CAM, etc.) and account for them. Third, most sellers will offer you the option to buy or lease the real estate. Do a side by side comparison taking the all-in debt service for business + lease cost vs. debt service for buying both into account. Banks love real estate, and the SBA will use a 25 year term for the real estate portion vs. 10 years for the business. When you buy both, you'll get a blended term, and if the real estate is worth more than 50% of the loan amount, you may even get 25 years on the whole package. That gives you an incredibly low debt service and competitive advantage. If you don't buy the real estate, like any other time you are leasing and getting an SBA loan, be prepared to get a lease + options that takes you out for the term of the loan (particularly if the location is important to your business and/or customers).

Reply by a professional
from University of Akron in Charlotte, NC, USA

For me, I usually advise against as I want people to maximize their leverage in the acquisition. In general, you're using your leverage to buy an expense instead of using it to buy cash flow. If you have limited resources, use them to maximize your cash flow and thus your return.

Of course, all situations are different and there could be great reason to purchase the real estate. Someone mentioned Sale- leaseback as an option, which definitely can be a tool to get creative with the acquisition and even add value.

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