Think Twice About Buying Commercial Real Estate
Early in my career, I owned a small marketing services business. Beyond a few computers and desks, we didn't have any assets to speak of.
I feared I wasn't building any equity in my business but, rather, just piddling away hours. I decided to look into buying a piece of commercial property to operate from as a hedge in case my business turned out to be worthless. I reasoned that at least I could sell the property when it was time to move on.
I had an advisory board of seasoned entrepreneurs, so I convened a meeting to discuss the purchase of a commercial property.
The meeting began well enough, with my outlining the merits of owning the space we operated from. Instead of paying thousands of dollars a month to a landlord, I argued, I could be paying the funds to myself. In 15 years, I calculated, I could own the property outright.
Finally, one of my advisers interrupted: 'What makes you think your marketing business isn't sellable?'
'It's just a collection of people. I have no hard assets,' I responded.
My adviser dug in. 'The only thing acquirers buy—the only thing—is the promise of a reliable stream of future profits. Focus on making your existing business more reliable and predictable, and you'll have a sellable company.'
The room went quiet; my advisers sensed I needed time to absorb this insight. After a minute or so, another adviser weighed in: 'Commercial real estate is a different business. The fastest way to jeopardize your existing business is to get distracted by starting a second business.'
By the end of the meeting, all of my directors had panned the idea of buying a space for our company.
I quickly decided against buying the property and focused instead on growing my business from leased space.
Recently, I ran into a friend of mine who is a partner in a successful venture capital firm. He had just decided to move his office from downtown Toronto to Yorkville, Toronto's most exclusive real estate market.
I decided to test the advice I had been given years earlier and asked my VC friend why he had chosen to rent instead of buy, which was clearly an option given the success of his firm. 'We're in the business of finding the next big technology business,' he said. 'We don't know the first thing about commercial real estate. Why would I pretend to understand that business?'
In the end, I built a business that was worth more than the real estate I was considering buying. I'll never know if I would have still been able to pull that off while simultaneously getting into the commercial real estate business. Maybe . . . but then again, maybe not.
John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies. Most recently John transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which was acquired by The Corporate Executive Board. In 2008 he was recognized by BtoB Magazine's 'Who's Who' list as one of America's most influential business-to-business marketers.
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