As we approach year-end, a lot of debt collection agency owners may be thinking about what do with their current facility space. Do they move into nicer digs, stay where they are and sign a longer term lease, or simply go out and buy a building?
We get these questions a lot from agency owners who are trying to understand how their facility space factors into the sale of the company. The short answer is that buyers are not typically interested in purchasing real estate in the acquisition of a business. There are always exceptions to the rule: the buyer has an affinity toward real estate, can acquire the real estate at a depressed value, it’s in a great location, or the tenants in the building are “blue chip” businesses locked into long-term leases.
Buyers’ View on Real Estate
Every deal has its nuances, but typically if the acquiring party is a financial buyer without a platform in the ARM industry, expect that they will want to keep the facility in place, assuming the operations have access to additional space for expansion, the rent is in line with market, and the surrounding community has a good pool of labor. If you own the building, you, of course, would want to lock the buyer into a long-term lease where you now have a solid tenant and monthly cash flow coming in the door.
If the buyer already has a platform in the industry, it is likely that they will consolidate some or all of the acquired operations into one of their existing sites to drive efficiency and realize a return on investment from the transaction. As a result, the buyer may not assume the facility space as part of the transaction. This is where the dilemma becomes apparent for a seller that owns real estate.
If the buyer goes down this path, the seller will need to either find a tenant for the space post-transaction or attempt to sell the building. Depending on the real estate market, finding a new tenant to occupy built-out call center space or selling the building may take you some time but will eventually happen. Of course, all of this depends on location and access to a good labor pool. But if the office is in an area where finding a tenant may prove difficult and little activity exists with the purchase and sale of buildings locally, the consolidation approach by a buyer may not be the best road to go down.
Real Estate Tips
A few tips to consider:
1. If an owner is going to lease space and knows the plan is to sell in the near-term (1-3 years), I wouldn’t lock into a long-term (5 years or more) lease. If the buyer decides to consolidate the operation, the seller may be responsible for the pay-off the remainder of the lease or finding a sub-lease option. We sometimes see that the buyer, as part of the transaction, may assume some or all of the cost of the outstanding lease as part of the transaction value.
2. If an owner wants to buy a building, or owns one currently, and is contemplating a transaction in the near-term, start thinking about what to do with the current space in the event the buyer wants to consolidate operations. Find out from a real estate agent what the building would fetch in the market and what the current rental market looks like for that type of facility space (monthly rent amount expected, timing to get a tenant into the space, what needs to be done to reconfigure space for the tenant, etc.). Owners may even need to consider listing the building for sale when commencing the sale of the agency so they are going down parallel paths.
3. If buying a building, set up a separate LLC and buy it through that entity. Get accounting and tax advice as to how best to establish the relationship between the LLC and the business.
4. If the building is already owned, determine if the collection agency is being charged fair market rent. If charging above market rent to the agency, you can make a positive adjustment (add back the excess amount that the buyer wouldn’t incur) to EBITDA (earnings before interest, taxes, depreciation and amortization). If the agency is paying below market rent, the owner will need to normalize the rent amount to show a buyer the true cost of the monthly facility expense which will ultimately lower adjusted EBITDA.
My biggest advice, think out 3-5 years at a minimum and map out your plan now for your facility and make sure that it lines up with your exit plan.
Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s Strategic Advisory team. Michael can be reached directly from Kaulkin Ginsberg’s Philadelphia office at 240-499-3808 or by email. You can also read his blogs on insideARM.com.