IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Khristal Karen of Avalon Risk Management (https://avalonriskmanagement.com/):
How Real Estate for Small Businesses Fuels Growth and Supports Exit Plans
Real estate is more than just a place for your business. It can give you financial security, room to grow, and even extra income. The right property can help you control costs, attract customers, and increase your business’s value. When it is time to move on, owning real estate can make selling easier or provide a steady income for the future. Whether you are expanding or planning your exit, smart real estate decisions can give you more stability and options.
The Interconnection Between Small Businesses and Real Estate
Small businesses are often considered the backbone of the economy, contributing to local job creation and economic vitality. According to a study by American Express, neighborhoods with thriving independent businesses saw home values outperform citywide markets by 50% over 14 years. This relationship is cyclical.
As small businesses grow, they attract more customers, increase foot traffic, and improve the desirability of an area. In turn, rising property values create better opportunities for business owners to build equity, secure financing, and benefit from a stronger local economy. However, location is key. Businesses in less desirable areas may not see the same appreciation, making property selection crucial.
Owning vs. Leasing Real Estate: A Strategic Decision
Entrepreneurs must decide whether to lease or buy commercial property, and a skilled realtor can help assess the best option. Owning offers long-term stability, shields against rent hikes, and provides more control over expenses. Leasing, on the other hand, can be a better fit for businesses that need flexibility, have limited upfront capital, or operate in fast-changing industries. It allows them to test markets without a long-term commitment.
Both options have their advantages, but owning real estate comes with unique benefits that can drive business growth:
1. Equity as a Financial Lever
Owning real estate allows small businesses to build equity over time. This equity is a powerful tool that can be used to secure financing for expansion, new equipment, or other investments. Unlike renting, where monthly payments offer no return, real estate ownership turns an expense into a financial asset.
However, leveraging equity comes with risks. Property values fluctuate, and loans tied to real estate can create financial strain if market conditions shift or business revenue declines. Business owners should evaluate these factors before using real estate as collateral.
2. Additional Revenue Streams
If your property has extra space, leasing portions of it to other businesses can create an additional income stream. This revenue can help cover mortgage costs, fund business growth, or provide financial cushioning during slow periods. Mixed-use properties, where businesses rent out upper-floor residential units or unused office space, are a growing trend that maximizes earning potential.
3. Stability for Long-Term Growth
Real estate ownership eliminates uncertainty around lease renewals and rent increases. This stability allows businesses to plan long-term strategies without worrying about sudden cost changes or forced relocations. It also ensures a consistent presence for customers, which strengthens brand loyalty.
However, owning comes with long-term commitments. Property taxes, maintenance costs, and market downturns can affect financial planning. A business must consider these factors when deciding if ownership is the right move.
4. Customization for Operational Efficiency
Owning a commercial property allows you to tailor the space to fit your exact business needs. Whether it is expanding production capacity, redesigning for customer experience, or adding new service areas, property ownership gives you the flexibility to make adjustments without landlord restrictions.
Real Estate as a Growth Catalyst
The location of a business directly impacts visibility, accessibility, and customer trust. A well-situated property increases foot traffic and brand recognition. Businesses that own prime-location real estate also benefit from long-term appreciation, adding to their financial stability.
Owning property also gives businesses more financial flexibility. Owners can refinance, take out a loan, or sell if needed. But real estate comes with risks. Commercial property insurance protects against unexpected damage or disasters, preventing major financial losses. With the right coverage, businesses can focus on growth without worrying about costly setbacks.
Exit Strategies Involving Real Estate
Real estate plays a crucial role in exit strategies. A well-managed property can make your business more attractive to buyers, provide ongoing income post-sale, or serve as a separate valuable asset.
1. Selling the Business with Property Included
When selling a business, including real estate often increases the overall sale price, and working with a real estate professional can help maximize value. Buyers prefer businesses with owned property because it reduces risk and eliminates lease uncertainties. If you own your location, you are in a stronger position to negotiate higher value and better terms.
2. Keeping the Property for Passive Income
Instead of selling both the business and property, some owners choose to retain the real estate and lease it to the new business owner. This creates a steady income stream while allowing for continued appreciation of the property. It is a smart strategy for owners who want to exit daily operations but maintain financial benefits.
3. Selling the Property and Business Separately
In some cases, selling the business and real estate separately maximizes profit. Business buyers and real estate investors have different priorities. A business buyer might not be willing to pay a premium for the property, while a real estate investor might see long-term value. By decoupling the two, you can potentially get a higher return. However, separating assets requires careful financial structuring to ensure both deals remain attractive to the right buyers.
4. Using Real Estate for Management Buyouts or ESOPs
If the exit plan involves selling to employees or management through a buyout or Employee Stock Ownership Plan (ESOP), real estate ownership makes financing easier. The property can serve as collateral, helping employees secure funding to take over the business while ensuring a smoother transition.
5. Liquidation of Real Estate Assets
If a business is closing, selling the property separately can provide liquidity to pay off debts or distribute funds among stakeholders. This should be a last resort, as it means losing a valuable appreciating asset. Market conditions matter, and leasing may be smarter when prices are low.
Real Estate Creates Growth and Exit Opportunities
Commercial real estate can be one of the most valuable assets for both growing a business and planning an exit. It provides financial stability, flexibility, and opportunities to build long-term wealth. Real estate decisions should align with market trends, financing, and business goals. Invest early in the right property strategy for more options to scale, secure financing, or exit on your terms. Making smart real estate decisions today ensures you are prepared for whatever comes next.
Author Bio:
Khristal Karen is a writer for Avalon Risk Management, covering real estate and insurance topics. She helps property owners understand smarter ways to protect their investments.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.