3 Common Mistakes Small Business Owners Make Buying Their First Building

1)   Not checking with the city regarding planned street improvements.

Most cities will resurface, improve, or significantly change busy thoroughfares at some point. These changes will clearly affect retail or personal service providers more than heavy industrial users, but keep in mind that a new median in a light industrial area can significantly change the way trucks and semis access even an industrial property.

Road construction can easily last a full spring or summer. A small retail business can easily get crushed during the 3 or 4 month period access is restricted to their customers.

The solution to this is spending the time to check with the city’s engineering office about upcoming traffic disruptions. The hour spent at the City prior to making an offer is well worth the thousands of dollars of potential business disruptions.

2)    Not buying a building that allows for growth

A result of a successful business is often the need to grow floor space, storage, production area, etc. Buying a building that does not have enough dirt or ability to expand in some way can be a bottle neck for continued growth. Commercial property usually takes some time to sell for full market price, so keep in mind that any building purchased may stick around for awhile.

To avoid this trap, be sure to buy a property that has less than a 1 to 5 building/land ratio for expansion. Another solution is to buy a property that has or could have an additional tenant sharing the building. The additional rent will support the building payments while you grow. As lease(s) expire, expansion is an option.

3)    Not putting enough equity into the deal.

This mistake is harder to do today with the recent recession fresh in lenders’ minds. However I encourage owner occupants to put as much equity into the deal as possible to provide a good margin of error. While the general economy probably will not blow up in the next several years (we hope!), remember that certain industries are dealing (or will deal) with paradigm shifts and new competitors. Sometimes having strong balance sheet is the best way to buy time for adaption or addition of new products or services to maintain profitability. Crushing principle and interest payments don’t help a business in transition.