Buying a business? Due diligence tips on how to understand your commercial property commitments

When looking to purchase an existing business, your first thought as a buyer will be to discuss the details with your lawyer. While that’s necessary, what often comes with a business is an existing lease of a commercial property.

The regulations surrounding the property, your rights to occupy it and how much you pay, can easily go overlooked.

Whether you’re buying a fish and chip shop or into a law practice, what’s important is to gain an in-depth understanding of the commercial property attached to the business – from your rights to use the property, to the value of the rent.

Understanding your commercial lease

The first thing that needs careful consideration is the length of your lease. When it comes to buying a business, the reality is that it can take several years to earn a profit from what you initially put in.

Ensure you not only have sufficient lease term, but also the ability to renew it – as you don’t want to end up at a loss when your business isn’t able to recover your investment.

It’s paramount to find out when the current lease ends, and if the minimum length is enough for you to have received value from your investment. Ideally, you want the freedom and ability to renew the lease.

Get to know the provisions and restrictions

Provisions of the lease are what will determine your rights to the commercial building when your business is operating.

It may sound trivial, but it’s crucial for business owners to get a clear understanding of the lease provisions, as there may be restrictions on the business – whether it be what you want to use the property for, or alterations you propose to make to the building.

While the business owner makes decisions about the commercial building, the landlord generally controls whether or not they can actually happen. You don’t want to run into any major restrictions with your business, because of what your landlord controls.

What you need to consider about your prospective commercial property

Understanding the lease is paramount in making a decision about buying a business and whether it’s worthwhile. But there are several more components that go into making an informed decision:

What’s owned by the landlord or the tenant? You need to gain clarity of who owns what fitout items. Is it the landlord, or the tenant? The additional items you might need to purchase when buying a business or ‘make good’ at termination will reflect costs to you at lease end, but also determine what the landlord covers under insurance. It’s also crucial to understand who is liable when something requires repair or replacement.

Can you continue to expand the business from the current property? Before buying a business it’s worthwhile to take a look at whether you can realistically run and grow the business from its current location. If you can’t, you should look at a commercial property that offers room for growth. But be wary of site ‘goodwill’, as the business could have been operated from the site for a long period of time and value may be attributed to this.

Is the current rent what it should be? Rent will contribute largely to your monthly expenses, and it is essential to establish not only the current rent, but also the market rent when buying a business. If the rent is low, a rent review may be imminent, and this will impact on profitability and value of the business. Can the business revenue withstand an increase in the rent? Conversely, if the current rent is high, is there scope to reduce the rent and therefore increase profit?

Steps you need to take

Before buying a business, consulting professionals who can assist and give you clarity around your commercial property is essential:

• Talk to a valuer. A qualified valuer will evaluate your lease restrictions, and inspect the commercial property in person to help determine what you’re entitled to and what you do and don’t own in the property. They’ll also provide an accurate rental value for the property, to ensure you know you’re paying the right amount and aren’t buying the business on an inflated profit.
• Get in touch with your lawyer. Talk to your lawyer to understand the legal restrictions around your commercial property. It’s important to have legal support from the very beginning so you can make an informed decision.

Our qualified valuers can assess your prospective commercial property and give you clarity around what to expect. Get in touch with a registered valuer today.

This article was originally published by TelferYoung