Selling a Manufacturing Business? The Under-Rent Trap Could Cost You Millions
Selling a Manufacturing Business? The Under-Rent Trap Could Cost You Millions
When selling an industrial manufacturing business, the physical site and customer mix dictate how your deal unfolds.
In many cases, the freehold property is worth 5 to 10 times the operating business. If your lease isn't set up properly before going to market, you risk leaving millions on the table.
Two Recent Sydney Deals
Two manufacturing businesses I listed in late January tell the story of how buyer pools and site requirements change the game. Both will settle around the end of October.
The first was a specialised plastics manufacturer. Because its client base is non-construction, revenue was steady and predictable. That broadened the buyer pool considerably, and we had an offer and acceptance within two weeks.
However, the legal side dragged out for six months before exchange. Since the machinery can be relocated if needed, the buyer signed a commercial lease with a first right of refusal on the property.
The second was a precast concrete operation.
There is nothing wrong with construction-related businesses, but project revenue is inherently lumpy. Not every buyer has the stomach for that, which narrows the buyer pool.
It took seven months to secure the right buyer. With massive curing yards and heavy infrastructure, the operation is practically impossible to move. The buyer decided to purchase the property as well.
The upside? Banks love lending against heavy industrial land, which made securing acquisition finance far easier.
The Under-Rent Trap
The biggest mistake I see owner-occupiers make is charging their own business cheap rent to show higher profits on the P&L. While that pushes up the business sale price on a multiple, it destroys far more wealth on the commercial property side.
Take a business doing $15M in sales with a $1.5M profit, paying $800k in rent when commercial market rent is actually $1M:
| Metric | Paying Cheap Rent ($800k) | Paying Market Rent ($1M) | Difference |
| Annual Rent | $800,000 | $1,000,000 | +$200,000 |
| Business Profit | $1,500,000 | $1,300,000 | -$200,000 |
| Business Value (3x multiple) | $4,500,000 | $3,900,000 | -$600,000 |
| Property Value (5% yield) | $16,000,000 | $20,000,000 | +$4,000,000 |
| Total Money in Your Pocket | $20,500,000 | $23,900,000 | +$3,400,000 |
By underpaying rent by $200k to gain $600k on the business sale, the vendor knocks $4M off their property value, wiping out $3.4M in overall wealth.
If you own both the business and the freehold, get a commercial market rental appraisal done well before going to market.
Put an arm’s-length lease in place at the right market rate, assess whether your plant is genuinely movable, and structure the transaction so you capture full value across both assets.
Tags: business broker tips business owners
About the author
Richard Matthews
Richard grew up in the 70’s running around his families pre-cast concrete yard in Moorebank, Western Sydney. Later in life he ran the family ...
