Owning a business and making daily decisions go hand-in-hand. But when it comes to purchasing your business premises, that is a financial decision that is not made lightly.
Chartered Professional Accountants Chris Joakim, Partner with MNP LLP in Markham, and Paul Rhodes, Partner, Audit and Assurance at Crowe Soberman LLP in Toronto, both regularly advise a wide variety of business owners in their respective practices. They agree that deciding whether to buy or rent premises from which to operate deserves careful consideration. Here are some of their tips to help you think it through.
Clarify plans for the business – Rhodes says that businesses in big cities often have more location options than their counterparts in smaller communities. The biggest consideration, he says, should be your plans for the business, how much flexibility you need with respect to your space and funds, and how best to address both.
With ownership come options – What you own, you control. Joakim points out that if you own your company’s facility and the land it’s on, you have more options for how to use the space. Subject to by-laws and necessary permits, you can modify the premises as you see fit, make structural changes and even rent out parts of it, if you like.
Property can be a good business investment – In a good real estate market, property you own and maintain well can build equity in your business. Both Joakim and Rhodes suggest you consider creating a separate legal entity or “holding company” to own the building apart from your main business. This can help protect it from creditors in tough times, and possibly even generate some tax savings if your main company leases the premises back from it. Talk to a Chartered Professional Accountant to be sure you structure this properly.
Business property can be a good personal investment – Don’t overlook opportunities for estate planning or income splitting that ownership offers. Shares of the “corporation” can be owned by a spouse or family trust. It is important to structure the ownership properly in order to avoid tax problems.
Property is a plus for prospective buyers – When it comes time to sell the business, owning the building is usually a good thing. If the purchaser wants the business, they can lease the premises to go with it. This leaves the hard asset – the building – in the hands of the seller, who can either hold on to it or sell it at some future, more advantageous point.
Sell, move and save taxes – If you own the building and decide to sell it and relocate the business, capital gains and recapture of capital cost allowance could be triggered. But replacement property rules can enable you to defer the taxes on the income of the sale of the building. If and when you replace the old building with a new one, it must be done within a specific time frame to qualify. The rules surrounding replacement properties are complicated and require a professional explanation from a Chartered Professional Accountant.
Renting allows easy outs – Leasing allows much more flexibility, especially if your business may need to relocate quickly or you don’t want to risk being stuck with a property you can’t sell. Leases can usually be broken for a fee and when their term is up, you’re out and on your way.
Renting can free up cash and capital – Buying almost always costs more than renting. If borrowing is limited – as is often the case with new or higher-risk businesses – owning a building can limit cash flow or working capital. Many franchise businesses, where change and growth is anticipated, will only rent their premises.
Mortgages may require personal guarantees – Think carefully what using your home or other personal assets to guarantee the mortgage on your business’s building can mean to your family and your personal credit rating if things don’t go well. Renting, at least to start, offers no such risk.
Consider your financial statements and your future – The balance sheet of a company that owns its building looks very different from one that rents it, the experts say. Land and buildings are assets that can be leveraged to secure additional debt. That can be salvation in bad times or a boon in good ones. But consider, too, the effect on your business’s credit if you default on a mortgage by taking on payments you can’t handle.
Credit: The Chartered Professional Accountants of Ontario.