Entrepreneurs Owning Office Space

Recently I was talking to entrepreneur that had just purchased an office building for his small but growing company. His business is doing well in a hot market that is set to explode over the next few years. Only, by purchasing a building, he’s set an artificial upper limit of employees for the firm. Several years ago, when I was talking to another entrepreneur about buying a building, he described it this way:

A goldfish will grow to the size of the fishbowl, and no more. An entrepreneur’s company won’t grow larger than the building.

The company will over optimize the number of employees for the size of the building, and not for the needs of the business. Yes, space can be rented in nearby buildings and adjustments can be made, but owning a building results in unnatural acts to not expand beyond it. If an entrepreneur has ambitions for major growth, and major growth requires a significant increase in employees, buying a building is a bad idea.

What else? What are your thoughts on entrepreneurs owning office space?

10 thoughts on “Entrepreneurs Owning Office Space

  1. I guess for smaller entrepreneurs is a way to expand their limits and take the next step, become “grown ups” and get into the serious business by taking a bigger bite than their usual. I know many who actually do expand afterwards, by buying more office buildings and than dividing their business into sections, each section with it’s own building. It can be rewarding if you do not lose the track of the success and direction. Or, it can ruin your initial business plan, if you spread into more sections than needed. It all depends on the management. However, at the end, you can sell the buildings and pay off the employees/debt.

  2. If any entrepreneur is planning to own office space they should first know how many employees will be able to work in that space beforehand. Then they need to ask themselves will it be enough? Purchasing office space is an investment that requires long term operation and if you are not willing to commit, then buying that space is completely useless. Owning office space can be a glorious business move depending on the goals you have for your company.

    Expansion and growth requires numerous employees that you can trust. They should be competent and know their place. There is nothing worse than a backseat driver when you are in the drivers seat.

  3. As a former commercial real estate appraiser turned software entrepreneur, you are absolutely correct. And I can do the math to show how purchasing real estate for certain types of businesses is a bad idea (like startups & companies certain to expand). For the same reason certain types of people shouldn’t buy homes: inflexibility. A good analogy is the cloud. It’s easier to spin up another Ec2 instance than squeeze more performance out of your on-site bare metal.

    Now buying office space as in investment in itself for lease to tenants is a different story. Interesting side note: a RE finance professor at GSU explained to us when an expanding public company purchases or builds fancy real estate in a prime location, that’s a great time to sell the stock (Apple, cough cough).

  4. Having 25 years of commercial real estate broker experience representing companies in their office space lease negotiations or building purchases, I have seen the downside of purchasing a building too soon. I have witnessed companies out grow their space or the configuration of the layout, and I have seen where they had to sell their building at a loss. Many times companies don’t think through the fact with the purchase of a building comes expenses of taxes, insurance and operating cost as well as maintenance headaches all leading to distractions. In most instances, it makes more sense to lease as you have greater flexibility while your company still MATURES and continues to progress and change. There are numerous creative lease clauses that provide the flexibility to expand or terminate a lease as well as other needs.

    Paul Mendel
    Richard Bowers & Co

  5. Reminds me of the line at the end of Back to the Future I when Doc said … “Roads? Where we’re going we won’t need roads!” Why work in a building with walls when you can work in the cloud where growth is unlimited?

  6. Could not agree more. Growing companies should not buy real estate. The transfer cost of buying and selling the building will wipe out any small profit you would make. Leasing space is a form of leverage for any growth company…..

  7. Good thoughts. I think an entrepreneur should buy a building big enough for the business to expand into (sublease excess space indefinitely). The building isn’t for the business; it’s for the entrepreneur-principal. It’s an investment, and the investment needs to not get in the way of the business by restricting growth, but it’s a great way for the entrepreneur to build wealth–as long as the building doesn’t become a distraction to the business.

    1. Exactly, Adam.

      Perhaps a different growth phase, but this discussion reminded me of the Benefitfocus IPO footnotes:

      “The two founders own the Benefitfocus headquarters building and had the company sign a 15 year lease with an aggregate of $47.8M in lease payments.”

      That $47.8M is for the two co-founders, not the business.

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