Buy a business for its property

Property has long been seen as a safe haven for investors. Increasing demand, both residentially and commercially, among real estate buyers meant that UK property prices increased by almost 10 per cent in 2014 alone, according to Halifax. Unsurprisingly, therefore, on the long list of reasons why someone would buy a business the chance to acquire property assets has always featured prominently.

Depending on the nature of the business, its property requirements will vary greatly, but the fundamental need for bricks, mortar and a roof overhead remains constant. Whether it is a restaurant in need of a kitchen, a retailer searching for a shop window or a manufacturer on the hunt for a warehouse, commercial properties are always in high demand.

Finding suitable premises from which to run a business can often prove troublesome though, so buying a business that has an ideal property already among its list of assets is a clever tactic. Indeed, there are a large number of mergers and acquisitions that are primarily motivated by the buyer’s desire to expand their property portfolio.

Putting Property First
There are a number of reasons why property might gain pride of place among one’s acquisition criteria when buying a business. A buyer might wish to use the property to house their own expanding business. Alternatively, they might have a different vision as to how to use a commercial property. Nevertheless, regardless of whether a property will be maintained in its existing guise or transformed for a new purpose, choosing the right one is vital.

For businesses that rely on customers physically entering their premises - namely the retail and leisure sectors - it is essential that they have a property that is not only well located but also fit for purpose. Having a pub in great condition with wonderful facilities is all very well, but if it is located in an unpopular or isolated area it may struggle to get people through the door. Likewise, a pub in the heart of a thriving community is excellent, but if it is a dilapidated building then substantial post-acquisition investment will be required or the business will suffer. Developing a good knowledge of a particular area and calling upon the services of professional surveyors will help ensure both boxes are ticked before proceeding.

The same basic principle is true for shops, restaurants, hotels, care homes and more - their very success relies on high quality property. Major UK bicycle retailer Evans Cycles is a good example; the company was sold to London-based private equity firm ECI for around £100 million last month and among its list of assets was 56 shops which, although dwarfed by its main rival Halfords' - which has 460 stores - occupy town centre locations while Halfords superstores are often on edge of town locations, it was reported.

Buying a business complete with a well-located property or properties that also boast the requisite specifications provides an immediate springboard for growth.

An Infrastructure for Growth
For many businesses, property limitations can place a very real glass ceiling on growth. From storage space through to personnel capacity, the need for a larger or additional property can often be the decisive factor as to whether turnover can be taken to the next level.

For a manufacturing company, for example, having insufficient space or equipment within a warehouse will directly affect the level of output the company can achieve or the size of the jobs it can take on. Therefore, in order to grow, businesses will often buy a rival, not simply to acquire new expertise, products or customers, but to expand the property portfolio.

The luxury homeware company WWRD, which was bought by the Finnish firm Fiskars for £283 million in May 2015, illustrates this point. Included within this business acquisition was a new £34 million manufacturing plant that was in the process of being redeveloped. While WWRD owns the historic Wedgwood and Royal Doulton brands, Fiskars’ chief executive Kari Kauniskangas also pointed to ‘the fantastic work that has been undertaken to redevelop the Wedgwood Estate’ as a major draw in the deal.

Distressed Businesses
Distressed businesses in particular are popular acquisition targets for those people who are seeking real estate on the cheap. Distressed companies, including those that have entered administration, are often put to the market as a going concern as opposed to liquidations where assets are split and placed with respective auction houses. Sometimes this results in off-market deals being done, with the property assets effectively sold at a discount to the market rate.

Take the Lansdowne Place Hotel for example. The Sussex seaside hotel, which has often been frequented by celebrity guests, was closed in 2013 when it collapsed into administration with £9 million debts. In May 2015 the 150-year-old property, which has planning permission already approved to be turned into 50 luxury homes, was listed on the market for an attractive £8 million.

Distressed businesses need to sell, and often must do so quickly, thereby placing the buyer in a strong bargaining position. That is why monitoring distressed opportunities can provide an easier route to obtaining commercial property. Distressed property management companies can be a good place to look as well; these firms typically have a larger portfolio of distressed properties to chose from, offering the buyer more choice while still giving them the chance to secure a good deal compared to standard market rates.

Again, however, thorough inspections must be carried out to ensure the property is suitable in size, quality and location for the purpose the buyer has in mind. It is also worth checking, as is the case for Lansdowne Place Hotel, that there would not be any restrictions with regards to planning permission for the intended changes post-acquisition.

A Safe Investment
At the heart of any M&A ought to be a long-term exit strategy - how can you ensure a good return on your investment? In this respect, property is usually a safe bet, if not necessarily high yielding. Regardless of how a sector is performing or the state of the business, when it comes time to sell up, a business buyer will recuperate a healthy portion of what they paid if there is good property among the list of assets.

Even manufacturing firms, offices or care homes that own their property can achieve great resale value because these sites are often of interest to developers, who will convert them into residential properties. As long as the buyer achieves a good price for the property in the first place as part of their business acquisition then this will make it far easier to generate a profit in a later sale, even if the performance of the business itself has not been particularly strong.

When buying a business with property in mind, it is important to instruct your lawyers to conduct the same searches and diligence that you would require if you were buying a property directly. Is it freehold or leasehold; is it clear of charges; what are the covenants etc. A thorough approach to checking the state of the property is also important; any repair work must be factored into the budget before proceeding with the acquisition. Make sure the tax aspect is also covered by your advisers. There are many potential situations where an incumbent owner can end up paying more than anticipated because of careless tax planning, not least of which is stamp duty land tax (SDLT) should the property need to be transferred out of its corporate ownership. It is possible when buying a property owned by a company to pay SDLT of less than one per cent.

Whether the property assets are a bonus in a business acquisition or the primary target, buying a company that comes with one or more properties can represent a considerable opportunity for growth, resale value and, ultimately, healthy profits.

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