Buying business when owner owns the real estate
February 14, 2024
by a searcher from University of Pennsylvania - The Wharton School in San Francisco, CA, USA
I'm looking at a small food processing / distribution company where the owner is selling both the business and the real estate. He is willing to sell the business standalone (which is all I want at this point), so I am curious if anyone has any advice on buying a business from someone who will also become your landlord? Any horror stories of the owner keeping their hand in the business longer than you want? Or tips on structuring the rental agreement to ensure there are no issues if he finds a buyer on the property? Thanks!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
One side thing to keep in mind is if you are interested in buying it eventually and you plan to use SBA financing for your business acquisition, there can be a benefit to buying the real estate at the same time you buy the business. First, it will make your offer more competitive if the seller really prefers to sell the real estate and they get offers from others willing to buy both the business and real estate. Secondly, you can do both the real estate and business in one SBA 7A loan. If the real estate is 50% or more of the total cost you can get a 25 year amortization on all of the debt combined. If it is less than 50% of the cost, you would get a blended amortization between 10 years and 17.5 years on the debt. The bank will assign 25 years to the portion of the debt that is real estate and 10 years to the portion of the debt that is business purchase, and then combine the amortization. This will typically provide anywhere from a 5% to 15% savings on monthly cash flow versus financing them both separately. Lastly, lenders usually provide slightly better pricing for deals with real estate involved as it provides additional collateral and a longer-term.
I hope this information helps. If you would like to discuss further you can reach me here or directly at redacted Good luck!
in Saskatoon, SK, Canada
If you do not acquire that building, then you will eventually expose yourself to risks such as new ownership and terms. You can make a tenancy fairly airtight up to that 5-year mark. After that... good luck.
But if the business is capable of moving when needed, then this isn't that big of a deal. But with food processing and distribution, I would guess that building is pretty important. If the time comes when you want to sell the business again, you will have a harder time selling it without the building in play as the building is a risk mitigator.
You are going to be paying lease fees anyway. Why not turn it into additional equity as you go? Assuming you have the acumen to run the business successfully.
You can also get a little cheeky with it and ask if he is willing to seller finance the building or at least get in writing the first rights to purchase after your lease term.
If you fast forward to the days after the business has run its course and you potentially still have the building, you can always redevelop the building to work for other business models. I have seen buildings like those work excellently as an In-fill strategy for the city. Enabling multiple small businesses to lease from the larger building. This process would take significant time and investment. But results in stable long-term cash flow.