House Keys

How to study a tenant's file ?

When investing in occupied walls, you need information to make your acquisition decision. We have seen how to study the quality of a location and the quality of the commercial lease. We will now study a tenant's file, we will focus on the "business" tenant, the study of the "residential" tenant being largely treated elsewhere.

Consistency between the commercial premises and the activity

The first element is common sense and does not require documentation or calculation. Are the occupied walls still suitable for the activity of the tenant? For various reasons, the latter may have diversified, its activity may have changed from a regulatory point of view (eg ERP standards) or from a customer point of view (eg discos are less frequented) or by through a competitor that changes the sector (eg Airbnb for hotels), or else its activity has been able to grow in volume. For all these reasons, he can cancel his lease at the first opportunity.

Conversely, have the occupied walls in question been the subject of specific works or improvements which would have resulted in a significant investment? little chance for the tenant to leave if the operation works.

The tenant's financial health

This brings us to the financial health of the tenant’s operation. At best, we need the last three balance sheets and possibly industry averages, so that we can compare the company to its competitors.

There are several ratios to analyze in order to have an opinion on the company studied, these are to be put into perspective with its market (growth, maturity or decline):

The working capital requirement (WCR) which calculates the needs of the company to finance its operating cycle
WCR = current assets (stocks + accounts receivable) - current liabilities (supplier debts + social debts + tax debts)
Working capital (FR) which analyzes the top of the balance sheet to ensure that permanent capital finances fixed assets
FR = permanent capital (equity + loans) - fixed assets
Net cash (TN) which is the difference between the two previous indicators
TN = FR - BFR

The gross margin which is the essential indicator to monitor, since it is a guarantee of the viability of the business, it is calculated by difference between the sale price (or turnover) and the cost price (the charges).
This can be analyzed product (or service) either at the company level or at the local level (object of the future acquisition)

Gross margin = sale price - cost price
It happens that we can have the balance sheets of the taker for reasons of confidentiality in particular, it is then necessary at least to obtain a turnover (CA), to be able to calculate a rate of effort (see article on the rate of effort) , possibly know the number of employees in order to deduct a payroll and compare with the sector. Finally try to determine the value of goods and equipment necessary to achieve this turnover. These calculations are not precise but allow, if you do not have factual elements, to position yourself on a file with its first ratios.

All of this data must be collected over two or three years in order to smooth out an exceptional year, for example, or vice versa.

To conclude, this analysis, as complete as it is, is based on past elements and does not completely predict future figures.

You must have a strategic vision of the tenant's activity and its location in order to anticipate changes in value.

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