The value of a small business is often defined as the value of its location. This is particularly true in the retail trades where the economics of the business are directly tied to the location
From the seller’s perspective the sale-ability of the business depends on the availability of a suitable lease for the buyer. Further the price obtainable may depend on the terms of the lease as a favorable lease will, of course, influence the future profitability of the enterprise.
A seller cannot intelligently offer the business for sale until certain a suitable lease is available for the buyer. Many small businesses cannot be sold because the seller cannot offer the buyer a reasonable lease and many more are sold at low or distressed prices because the business offers a disadvantageous lease. This is increasingly common in today’s rapidly escalating commercial space market where prime locations are renting at premium rates, not always affordable by the small independent business.
The opposite may also be true. Many sellers hold very favorable leases which are assignable to the buyer, but these sellers may fail to exploit the economic value of the lease. A long-term assignable lease with a rent well below market price, may yield the seller a far greater price if he approaches the transaction in terms of the lease. Many have capitalized on their lease value by liquidating assets and sub-leasing the space, recouping even greater profits on the rent override.
While most businesses are sold with the expectancy the buyer will remain at the location, buyers may consider relocation. This is common with service and manufacturing businesses where the buyer may consider the location of little or no importance, preferring instead to relocate the assets to a more suitable location, or merge it into its existing plant. Although this can seldom be anticipated in advance, the possibility cannot be overlooked. The buyer’s perspectives must be substantially broader. Where the business depends on the location, the evaluation will include:
1). The market area evaluation.
2), The site evaluation.
3). The premises evaluation.
4). The lease terms.
For more information or a private consultation, please feel free to call our office 716-668-6868.
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