🟠 Small Business + Real Estate = A Match Made in Heaven

Small business owners who bought real estate have generated massive incremental wealth for themselves. This SMB Scoop issue will give you a taste of why this may be attractive to at least consider for your current or future businesses.

I'm hosting my first-ever Twitter Space about real estate + SMB combo, basically a big group conference call, next Monday at 7pm CT (2/20/2023). I'm expecting a few hundred small business owners to join based on the current RSVP list! Click here to register & get a reminder (you may need a Twitter account I think?). 

SMB + RE = A Match Made in Heaven

The majority of small business owners ($2-$25M of revenue) I know either outright own or wish they owned the real estate their business operates out of.

I didn't truly understand the strategy of combining real estate and small business cash flow until I dove into the tax benefits of owning real estate and hearing others entrepreneurs passion on the subject. The combination of small business and real estate is a match made in heaven. The benefits below:

• if you or your spouse is a Real Estate Professional according to the IRS, you can accelerate depreciation on the purchase of the real estate (using a cost segregation study after purchase) and apply it against your active operating income from your business or W2 income. You bring a big expense (loss) forward and apply it against your active income today. Meaning way less taxes on your income today.

• control over the real estate, no more landlord to raise your rent or kick you out at the end of your lease

• ability to re-rent the real estate if you outgrow or don't need your space anymore

• appreciation of real estate

• diversification of your assets to something other than your SMB

• downside protection. You could shut down your SMB...keep the real estate and still make out like a bandit

• extremely attractive small business real estate financing is available (see SBA 504 financing below)

• can blend a SBA 7a loan + 504 loan to get a lower amortization period on the entire purchase (25 years instead of 10 years), materially increasing cash flow if you're buying SMB + business at the same time

You’d be surprised after 10 years of business ownership how much value small business owners get from their business vs the real estate. Sometimes the building is worth more than the business at exit - I see this frequently. I just saw a deal where a $4M enterprise value business was sold and the building it was operating out of worth was $5M.

When I'm putting in an offer to buy a small business, I as a business buyer assume & expect there to be a 'market lease' in place between the business and the landlord. Sometimes this landlord is the seller, other times it's a third party.

Business owners who own the associated real estate tend do much better financially than those who just own the operating business (and rent). Upon a potential sale of an operating business, the new buyer may or may not want to purchase the associated real estate. The buyer may want to just enter into a lease agreement, allowing you to keep the real estate long-term and further benefit from ongoing rental payments + future appreciation. It's kind of like you're getting a guaranteed revenue share of the operating business you just sold!

There is massive leverage & power in owning the real estate that accrues over time (remember McDonalds? They're actually a real estate company disguised as a burger restaurant).

I've seen business sellers play games with the real estate as well. The business seller can 'adjust' market rent to be higher than market, capturing more value to their real estate. They're swapping earnings of a business to real estate (business earnings valued at 4x EBITDA while real estate earnings are valued at 20x+ EBITDA in some markets).

So if you're a business buyer, reminder to check that the lease in place is actually fair & market!

SBA 504 Financing

The below picture shows an example of a SBA 504 loan using a $1.2M purchase with $120K down (10% down). The SBA offers a number of attractive lending programs to small business owners. SBA 504 loan program details here.

Common questions from SMB owners about Real Estate

• Grow out of the space or don’t need it anymore? Just lease it out as long as it's flexible spot. Get mail box money. Watch it appreciate over 10 years (hopefully).

• Landlord won’t sell? At the end of your lease, plan to buy or develop a property. Provide notice of vacate to landlord but tell them you’d be happy to buy the building. Or just find a new location for your business to either buy or build

• Not enough liquid cash? Raise money from your network for the down payment. Great opportunities always get funded.

• What if I don't want Real Estate exposure? Consider a sale leaseback. If you're buying a business and the seller has mispriced the real estate, you can capture that value through a sale leaseback (effectively decreasing your purchase price). How it works: you buy the real estate from the owner, then immediately sell it to a third party while entering into a new long-term lease. The difference between the two sale prices is your profit. This is a strategy many private equity firms use when buying a business that has real estate, but they have no interest in holding (the expected return on real estate is too low for them)

Reminder: I'm Hosting a Twitter Spaces on 2/20/2023

If you want to learn more about this topic, and hear from way smarter people from me: I'm hosting a Twitter Space, basically a group conference call with 100+ SMB owners, it will be next Monday at 7pm CT (2/20/2023). Click here to register & get a reminder (you may need a Twitter account I think).

Accredited Investors: Want to get in the flow of passive SMB and ETA deals? I'm starting a LP/investor list where I'll send you off-market SMB deals through my network.

Reply if you found this if you found it helpful, I want to see if any of you are actually reading this! :-)

Appreciate you,

Ben Tiggelaar