Lease, Buy or Build: Questions to Consider for Manufacturers
We've all heard the business success stories that began in a garage somewhere. To refresh your memory, here are twelve famous companies that did just that.
But for these company founders, eventual growth led them to the inevitable problem of whether to lease, buy or build their own space.
If your pockets are as deep as Harley-Davidson, which went from a garage in Milwaukee to its own campus, complete with an aptly named restaurant, Motor, and a museum, have at it. But if you're like most manufacturers, the luxury of building a dream facility like this is rare.
So, what are your options? We look at the pros and cons of leasing and building here.
Leasing Can Save You Up Front, However…
If you're looking to save money upfront, leasing has the edge over building or buying. But short-term savings can lead to overall greater spending in the long run.
In this piece Deciding whether to lease or buy a business facility, the author states:
"A lease may sometimes beat out a purchase in terms of cash flow, particularly in the early years. But over the long haul, a purchase is usually cheaper because a landlord, in addition to paying all of the costs associated with purchasing and maintaining the property, will attempt to build in a profit."
Moreover, while a lease may give you more freedom with cash up front, it may limit you in other ways. You may not be able to modify the facility to your specifications, or you may have to clear several hurdles with the owner before doing so.
A lease also prevents you from enjoying the financial advantages of building appreciation. And it may also curtail any plans to add on or modify the facility as your company grows.
Buying Has Its Perks, But…
While it may considerably impact your bottom line up front, buying a facility has some advantages you won't capitalize on with leasing.
For example, let's say you're leasing a facility in an area convenient for your workforce. If rent escalates to a point where it's no longer feasible to operate from that location, not only are you searching for a new place, but you may also lose the advantage of workforce proximity.
If you own the building, you avoid this. Moreover, you're no longer at the mercy of new ownership should the owners ever sell.
That said, there are considerations to buying that can complicate the decision. The freedom of owning your facility may also carry the burden—and costs—of providing your own maintenance, security, and general upkeep, items typically covered in a leasing situation.
UpKeep.com provides a simple example of calculating the maintenance costs associated with one unit of production here.
Building Can Be Ideal, Yet…
The most ambitious option of all, building your manufacturing facility, carries many decisions, plusses, and pitfalls.
Jewett construction states in its blog post, 10 Critical Steps to Planning Your Manufacturing Plant's Construction, "it can be an exciting operation, and often frustrating…with plenty of problems that may occur along the way."
Considerations outlined in the piece include:
- Finding a location
- Getting approvals and permits
- Securing funding
- Planning and concepting design
- Aligning construction schedule with existing goals
- Procuring a builder
It can get complex, but building your own facility lets you control various factors you won't experience when buying or leasing. And when you imagine the outcome—a facility built to exact specifications in a location of your choosing that you own—the choice can be preferable.
When taken to the extreme, Apple Park, the $5 billion facility housing the computer manufacturer's headquarters, comes to mind. On a more practical level, a 25,000-square-foot tool and dye manufacturing facility may be more to your liking.
The point is building defines dreams, whether they're extravagant or practical. Choosing this route allows you to think different (yes, that's an Apple tagline) on your terms.
The choice between leasing, buying, or building manufacturing space is not to be made lightly. While each has its up- and downsides, your circumstances will dictate what's right for you.