Should Your Business Rent or Buy?
Having been in the business for over 20 years and worked with hundreds of tenants, I frequently get asked whether they are better off owning or renting their office/warehouse space. My answer is not likely something you have heard before. It is not an equation your accountant or realtor may provide. The answer lies in whether your business has high or low “enterprise value”. If you have high enterprise value, don’t buy. If you have low enterprise value, buy.

How exactly do you determine your “enterprise value”? Your business has enterprise value if you can sell it for over $2,000,000 without any real estate. Enterprise value means the business does not depend on you—if you are not involved in the business, it will continue to run, grow and receive profits. Here are some typical characteristics of a high enterprise value company:

1. Consistently produces good profit and cash flow

2. In a niche market

3. Has 10 or more employees

4. CEO can go on vacation for a month and the business does not crater

On the other end, you are a low enterprise value company if:

1. You are a one or two person shop

2. You are in a commodity style business (with many similar providers in the market – like plumbing or car repair)

3. You are doing most of the work

My advice for high enterprise value companies is not to buy. Why? Because by renting, high enterprise value companies have more flexibility to make changes such as moving locations or expanding. This flexibility allows for better focus on preserving and increasing the value of the business rather then getting tied to and distracted by real estate ownership. Additionally, this allows the use of working capital to grow the value. Most importantly, renting allows the owner to sell the company when the time is appropriate and exit without any real estate obligations.

If the value of your business without you as the owner is questionable, then buy. Why? Because when the time comes for you to retire or sell the business, you will have the value of the real estate to profit from. Often times, businesses do not sell for as much as desired but the owner can still walk away with a big check for the real estate he bought and paid off over 20 years of owning and running the company.

Take a look at your business and ask yourself, do you have enterprise value? There within lies the answer to buy or rent for your business.

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Submitted by: Barry Raber   |   Thursday, May 26, 2011 12:00 PM   |   Posted in: The Economy and Commercial Real Estate
lease space   rent space   real estate   enterprise  




Contributor: Devin Gardner