Real estate plays an important role in any business. As a significant long term asset, real estate represents a major financial investment. Whether it is owned or leased, real estate is one of the largest fixed expenses for many businesses.
Unfortunately many owners do not give enough thought to the role that real estate plays in their business strategy. Whether your plan is to stand pat, buy, or sell, the financial management of real estate plays a significant part in that strategy.
But many owners do not understand how outside parties view real estate and the implications that may have financially and strategically. Many owners I speak with are surprised when they learn that a potential acquirer has no interest in buying real estate. Depending on your individual location, sometimes real estate can be valued as much as the existing businesses, if not more. For an owner who has acquired a multi-million dollar asset by allowing a business to pay off the note on the property over time, the idea that a multi-million dollar institution would not be interested in acquiring this asset seems outright strange.
There are a number of factors that preclude a larger organization from acquiring real estate in a transaction. In an industry that is rapidly consolidating, such as the collision industry, capital is scarce. In an industry where rapid growth is key to success, many large consolidators are not interested in investing in property. They are collision repair specialists, and the best use of the firm’s resources is in acquiring, building, and operating collision repair facilities. In other words, they have a core competency in collision repair and not property investment and management. Investing in property would distract the management team from doing their core job – building a successful collision repair business. Every dollar invested in real estate is a dollar the management team is unable to reinvest back into their existing business.
Additionally, many of the large consolidators are backed by some of the largest and most prolific private equity groups in the world. While the large private equity groups that have invested in the industry have access to what at times seems like infinite capital, the reality is they also face constraints on the allocation of capital. Even the largest most prolific firms like Blackstone and Carlyle have limited resources. Within those limited resources, they raise billions of dollars into individual funds with very specific investment and growth strategies. These investment strategies are often carefully designed to diversify specific risk to build an optimized portfolio of financial assets. In other words, the investment fund that invests in collision repair is separate and unique from the fund that invests in commercial property. The nuances and risk factors involved in collision repair are unique to collision repair and share little if any similarity with the risk factors associated in investing in real estate. Much for the same reasons that operationally a large consolidator does not invest in property, financially private equity groups also do not wish to mix investments in real assets with operating assets. Continue reading here.
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