309. Navigating the Sale of Your Coworking Space: An Insider's Guide

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309. Navigating the Sale of Your Coworking Space: An Insider's Guide

00:00:09,"Welcome to the Everything Coworking podcast, where every week I keep you updated on the latest trends and how-tos in Coworking. I owned and operated co-working spaces for eight years and then served as the executive director of the Global Workspace Association for five years. And today I work with hundreds of operators and community managers every month, allowing me to bring you thought-provoking operator case studies and inspirational interviews with industry thought leaders to help you confidently stay on top of what's important and what you can apply to your own role in the Coworking industry."

00:00:57,"Welcome to the Everything Coworking podcast. This is your host, Jamie Russo. Thank you for joining me Today we are going to talk about a topic that has become, I think, a little bit more prevalent recently, at least among the folks that are part of our operator membership. It, and I get emails about this, so I thought, you know what?"

00:01:16,"The podcast is a good place to talk more broadly about the topic of navigating the sale of your co-working space. So we're gonna talk about timing of a sale, preparing for the sale, valuing your co-working space, identifying who might be a potential buyer, how to market your Coworking space, a little bit about negotiating the deal, some things you're gonna wanna consider post-sale,"

00:01:41,"and then we'll wrap it up. So I, we'll start by saying I sold my Coworking space in Chicago after a few years of running it, and I'll try to maybe weave some of those experiences in as they are relevant. So that was not something I had planned to do. I opened my Coworking space in Chicago in very early 2012, still pretty new in the Coworking world."

00:02:06,"I was new to owning my own business. I had lots of business experience, but not in terms of running my own, was still learning a lot of things. I loved going to the space every day. I loved my members and my husband got a job offer in the Bay Area, so I had said to him before we opened, Hey, I'm opening this local business so we'll be here for a while."

00:02:26,"And he said, and then things change. So that is what I'm seeing happen. So we moved and that was not something I had expected, but I took it as an opportunity to just put systems in place so that the business could run with me overseeing it remotely. But with an onsite manager. The the, I see that was a life change for me."

00:02:48,"I see that happening sometimes we see people post covid just like it was a hard time to get through and they're not getting the returns they're looking for. And so they want to see is there a way to get out. So when I talk about selling your Coworking space, I'm talking more about I have a pretty successful Coworking space and something has changed in my life."

00:03:08,"And so I am looking for options to be less involved in the business and selling those as one of them. When you're not making any money and the business is not working, it's very hard to sell the business. That's more like handing back the keys, trying to get out of a tough situation, which maybe we'll do another episode on. So this is really about,"

00:03:27,"there's some value to this business. What does it look like to sell? So you might be selling for personal life circumstances, business circumstances, maybe retirement. So here are some things to think about when you're preparing for a sale and you wanna be intentional. And there are probably some things you're gonna wanna do to get the business in shape for a sale."

00:03:49,"So it may not be ready overnight. And so if you're thinking about this even as a longer term strategy, this is a good episode for you, even if it's not something you're gonna do right away. Okay, so here's what we wanna think about. If you are thinking about making your space attractive to buyers. So buyers want, they don't wanna sell a mystery,"

00:04:08,"right? They wanna sell like guaranteed revenue. The value that exists in a Coworking space is one the lease. So I would encourage you to negotiate extensions on your lease. Make sure there's some predictability and uncertainty around your lease because if there, if your lease is up in a year and it has to be negotiated at market rent and it's unclear what market rent is,"

00:04:34,"the buyer is gonna have a tough time agreeing to a sale because paying rent is such a big driver of the ability to be profitable, right? So if your rent goes up, actually I will use this as a time to bring in my own experience. This was not through any sort of brilliant negotiating on my part because I had no idea what I was doing when I started my first space,"

00:04:55,"which is why I now help others learn all of the pitfalls of starting a Coworking space. But fortunately, I started in a neighborhood in Chicago, it was the Meatpacking district, if anybody was familiar with Chicago. So there used to be like forklifts driving around warehouse in my neighborhood. But it was a beautiful location, brick and timber building, gorgeous full views of the skyline."

00:05:19,"I loved that space. It was still very much gentrifying up and coming location. So my rent was pretty reasonable when I signed. It was a triple net lease, which can be a pain, but it was still pretty manageable. And then Google moved, its Chicago headquarters. It, I don't know that it had a Chicago office before then. Maybe it was small."

00:05:39,"It put its giant Chicago headquarters like two blocks down the street from me. So the neighborhood started to explode. So if you've been there recently, it's the Fulton market neighborhood and there is a lot happening there and rents have gone through the roof. So fortunately I had two five-year extensions on my lease and they were at a fixed increase. So we weren't renegotiating to market rent because market rent probably would've been made it pretty challenging for the business model to work."

00:06:09,"I had a very good lease in place, which helped with my sale later on. You want some predictability for the buyer. That is especially important in our business where you're essentially like marking up the real estates. The real estate rate is very important. You wanna have some stability in your business, you wanna have a strong customer base and you want to,"

00:06:29,"to some extent, this is a little, there's some nuances here around the physical space and amenities. You want the space to be in good shape and not need repairs. So in terms of business stability, you wanna be able to show that you have recurring revenue. And this is jumping ahead a little bit, but that means having contracts in place. And so make sure you're running a really professional business with all the systems in place."

00:06:53,"You have agreements from all your members, you have a formal member agreement, you have a system that bills them every single month. Very predictably, if a payment fails, you can identify that payment right away. You're essentially selling the value of the membership. Now, one challenge you might have that's inherent to our business model is that these customers may only have 30 day agreement."

00:07:16,"So a buyer could argue there's maybe not a lot of value if your membership could churn upon a sale. What if everyone was unhappy about the sale and decided to leave and they only had a 30 day notice? So maybe that buys the new owner two months. It's very unlikely that this would happen. That definitely did not happen when I sold my Coworking space."

00:07:37,"But it could be a concern that the buyer has. You wanna have agreements in place if you have offices and you could shift them to year long commitments that would be ideal from a buyer's perspective, it might be really challenging for you to do. It's something to think about though you are, because they're really looking for a stable business. So we have all the things in place that are,"

00:07:59,"make it a professional business. You have up-to-date books, you have a bookkeeping process. Ideally you've outsourced your bookkeeping. So if you have your Community Manager doing managing QuickBooks, I don't think that's very common. It does happen. That's okay for now. But if you were to sell your location, you probably wanna outsource that in advance so that those two roles are clearly separated so that if there's Community Manager turnover,"

00:08:24,"the bookkeeping skills don't go with that person, that it's easy to maintain continuity because you have an external bookkeeper. You okay? Here's the thing about physical space that I will mention. You want to, obviously the space needs to show really well just like in needs to show for your members. So I'm gonna assume that it's in great shape. I will say though,"

00:08:46,"if you have an older business that's been around for a long time, it is possible that your furniture is dated. And so there you may not be able to sign any value for the furniture. If your furniture is fairly new and works well with the space and the brand and the positioning of a new buyer, there might be some value to the furniture that's really negotiable."

00:09:06,"The bigger challenge that you're gonna have with the structure of the location is that a sophisticated buyer is going to be looking for density in the layout. And when I have talked about density a little bit, and that can vary based on the model, right? But let's assume we're talking about a pretty traditional office space model. If you have a lot of open space and you're not monetizing that space very well,"

00:09:31,"they're gonna come in and they're going to have the lens that they need to do some te, some tenant improvement work. They need to create more offices in order to optimize their pro forma. And so you're gonna have less value in the business if they need to come in and do work. If they can't renegotiate with the landlord, and if you're in the middle of a lease,"

00:09:51,"then you're probably not gonna get additional ti. They might have to close the space to do the construction. That's could just be a deal breaker. Are you working on starting a Coworking space in 2023 or even 2024? We want to make sure you are set up for success. You hear me talk about this a lot. The biggest mistakes made in Coworking businesses are made before you ever open your doors,"

00:10:22,"before you ever sign your lease, your lease, your product mix and ensuring that your real estate deal and your offers align with your ideal future members are everything in terms of making sure that you set your business up for success. We can fix your marketing and your paint colors and your bathroom fixtures anytime, but we cannot redo your real estate deal or your product mix."

00:10:49,"We can, it's just really expensive. So we wanna help you get all of that right and be among the Coworking space operators that are sleeping well at night because they sign the right real estate deal and they know that their business is set up for ongoing sustainability and set up to meet their financial goals. So we'd love to have you join us in the Coworking Startup School."

00:11:12,"We cover getting started with your real estate search and signing your lease and picking your product mix and more. If you already have a location, over half of our members are already building owners, you can get all the details of what's covered in our program at Everything Coworking dot com slash start. I've seen that happen a lot where some of the bigger Coworking brands are interested in a location and maybe using that location to get into a market,"

00:11:42,"but the layout is just not dense enough to support all the corporate allocations that they put on a local proforma. That type of buyer may not work. And so that's related to the physical space. I talked to an operator recently who said they had, they have some debt on the space, lots of folks take out loans in order to open the space."

00:12:01,"It's not very typical that a buyer would pay off those debts. What is more likely to happen is that you use the proceeds of the sale in order to pay off those debts. It's not super common in a smaller business like this where you're gonna be able to transfer that debt for them to pay off. And the debt is also probably personal debt that you have,"

00:12:19,"not business debt. So it probably, there's probably not a great easy way for that to transfer anyway. Again, you wanna make sure that your financial statements are up to date. It's not great to be running those in Excel. If you're looking for a sale, you're gonna wanna have those in QuickBooks so that if somebody says, Hey, can I see your p and l,"

00:12:37,"your balance sheet cash flow statements, you can pull all of that right out of QuickBooks. The other systems you wanna have in place before selling, and this is pretty important because as a small business owner, it may be that your systems are not quite as dialed in as they could be. And it depends on how sophisticated the buyer is. But they're gonna be looking for those things to be in place."

00:12:59,"Again, really, they're gonna be looking for stability of the business. They wanna know that if they take it over, it's repeatable. So they're gonna wanna see systems in place unless they're coming in with their own systems, which is possible. But again, if it's a larger Coworking brand and you don't have the density that they're looking for, then they're not gonna bring their,"

00:13:18,"they don't, they're not gonna, your location is not gonna work for them and they're not gonna bring the systems. So assuming your buyer is, we're skipping ahead a little bit on that too. But maybe a buyer is a member or another business owner in the community who's interested in this business model. They are gonna want you to train them on the systems that you use to run the space."

00:13:40,"They don't wanna start from scratch. That's if they wanted to start from scratch, they would go sign their own lease and build their own Coworking space from scratch their, that's if this is the opportunity to transfer a successful business, they want to have access to your operational systems, your financial systems, your HR systems, your customer service systems, your billing systems,"

00:14:01,"et cetera. So that means having documentation in place, having an employee handbook, having an operations handbook, again, making sure you have a bookkeeper, your taxes are all up to date. HR systems are probably a little advanced for our businesses, but if you have employees, then you have clear employment contracts in place that you're paying them correctly as W2 employees that's being done through a system that they can see and they can take over."

00:14:27,"You gonna have all of those things in place. So if you're thinking about selling but you don't have all of these things in place, then that will make it very hard to sell or reduce the value of your space. So you wanna get those things in place and start working on those as goals. Again, legal considerations you wanna have your contracts with your members are very clear."

00:14:49,"If a big part of your business is say events, you wanna have your event contracts in place, you wanna make sure you have the right business registrations and permits. Any, you don't want anything to stand in the way from a documentation legal standpoint. Okay, so let's talk a little bit about valuation. This can be really tricky because as we said,"

00:15:08,"this business is a little bit unusual in that the real estate, the lease that you have if it's a leased location, has a lot to do with your ability to be successful and a new owner to take over and be successful. So that will determine the value of the space. If the space is like up to date and there's a great product market fit and things are going really well,"

00:15:31,"then the, that will be factored into the value. If furniture is dated, the carpet's bad, there are issues with the space that is definitely going to impact the value negatively. Things like occupancy rates. So if you are profitable, then that's a, that's wonderful. If you're barely profitable and there's room for higher occupancy, that may be seen as an opportunity for the buyer."

00:15:57,"Or they may wonder is there something wrong? What's not being done well? Is this going to be challenging for me? Am I gonna be able to get that occupancy up again? Is that an opportunity or is this kind of a challenging business because of the location or the parking or something that isn't fixable? And again, profitability is obviously going to be important."

00:16:18,"If your business is not profitable, it's going to be very hard for you to sell it for any sort of value because generally the sale price is based on a multiple of ebitda, which is earnings before interest, taxes and depreciation and amortization. So basically your profit before taxes and other stuff is taken out and the multiple is not probably as high as you would want it to be,"

00:16:43,"but it's pretty typical for small business, it's gonna be roughly three x. If you have multiple locations in a region. If you have larger locations, that number may go up. If you have really appealing locations that are already dent and very profitable and there's something very compelling about your brand and what you have in place, that multiple might go up. But in general,"

00:17:05,"the multiple's gonna be three to five x. There's a great Donald Miller business made simple podcast about selling a smaller business. So I'm gonna link to that cuz he makes a lot of these points as as well, not he, but he had a guest who talked about the process of selling a small business. So that's gonna be what a multiple looks like, three x of what your profit is."

00:17:29,"Now we're not that far out of, and sometimes that will be like an average over the last three years. So if you've had a year and a lot of, you're probably in this boat where you're just killing it in the last year, but the years, two years before that don't look very good because of covid. That's part of the negotiation. So traditionally it would be an average number over a little bit of time to take out sort of any anomalies."

00:17:52,"But Covid was certainly an anomaly. So you have to take that into consideration and the buyer will just have to understand that and you'll have to figure that out as you're negotiating. So who might be a good potential buyer? A member is a great potential buyer. You might have some members who are just big advocates of the work that you do. And this may feel tricky because you don't want to upset members,"

00:18:16,"you don't want to make them stressed that you might be handing the business over to someone else. I know that was a huge concern for me. I was very anxious about the fact that the members liked me, they knew me. I wasn't there all the time by the time that I sold the business, but I was still certainly part of the brand,"

00:18:32,"part of their experience to some extent. So I was very anxious about that. And you might feel like it's not really possible to reach out to members, but you might find a few select folks that you know that you think might be interested and just let them know that you're looking around and you're thinking about it and might they be interested. So I know folks that are working through this process right now have done that and have come up with some interested parties."

00:18:59,"Just like you might find members who are interested in helping invest in your expansion. Other Coworking brands can be, although again they're gonna have a really high bar, they understand the business model, they're gonna want a dense location. Typically, if you have a unique model, generate a lot of revenue from events and you have an events manager and other Coworking brands don't operate with the same kind of revenue streams,"

00:19:27,"it may be hard to find that fit. Not impossible, it certainly happens. Other local entrepreneurs who might have some sort of synergy with your space like an attorney or somebody who sees clients and has a, gets a lot of value out of a Coworking space that might be a good candidate or other local businesses that might be somehow a little bit related. Maybe they maybe a local coaching business or something like that that supports entrepreneurs and it makes sense for them to have a physical space."

00:19:55,"Okay, so if you are thinking about selling your Coworking space, how do you go about doing that? You can hire a business broker and I know folks who have done this and that can be a little bit challenging if the business broker isn't familiar with the model. And I don't generally hear this is really successful, but it's something you can look at."

00:20:17,"I would be careful about going through the process of having your business valued by an external party who doesn't understand the model at all. This is gonna be a challenge with having a business broker is they probably wanna get a valuation done. It will be expensive and it may not be very accurate. So it is really quite simple. That three x number is pretty straightforward."

00:20:36,"And then really from there it's gonna be a negotiation. Can I get paid for the assets? You know what? What other value is placed on the business is gonna have a lot to do with how many potential buyers you have, have and what they're willing to pay. You might be able to list it online. There are business brokers and things like that and you might just have to be a little bit scrappy and talk to network with folks in your local market."

00:20:59,"Pass the word around and certainly again, talk to members who you think might be good candidates. Talk a little bit about negotiating the deal. There's, there's a lot of stuff that goes a lot of aspects of this process that will be time consuming. You'll need inventory lists of all your assets, meaning your furniture, your equipment. I remember when I got to this point,"

00:21:22,"so I operated my Chicago space remotely for several years and I had some great managers and great systems in place that allowed this to be successful. It was most give most of the credit to the folks that were managing my space. And at some point though, it became, I was operating a space in Chicago and a space in Palo Alto. They're not close to each other."

00:21:43,"There's no benefit, there's no brand building benefit. There's basically no economies of scale to having locations so far apart. And there was a Coworking group in nearby Midwestern city that was very interested in getting into the Chicago market. After lots of discussions about selling my baby, they bought my Chicago location. It was a lot of work. So inventory lists, a lot of legal documentation and you have to have some support for that process."

00:22:11,"You'll need an attorney. They had initiated the acquisition and had an attorney that they were already working with. So they really initiated a lot of that process, which was very helpful. But if you are the one initiating the sale, then you may have to do that on your own. There's paperwork and legal documents that you have to go through to turn over a lease."

00:22:31,"So you'll wanna see what those requirements are in your state. Again, having an attorney on your side will be very helpful. In the state of Illinois, it was essentially the case that the landlord really was not supposed to get in the way of transferring a lease. I can't remember if it was a transfer, a lease or if it technically was a sublease."

00:22:50,"I think I still had the underlying liability for that lease maybe until a renewal came up. I can't honestly remember the details. I do remember that there was still some liability for me for some period of time, even though I was like reassigning the lease. So there's a lot of legal paperwork. It is time-consuming, very sort of distracting in terms of having to really put your focus on pulling a lot of things together."

00:23:15,"Make sure you have an attorney and just someone you know, a third party maybe that can help you negotiate and have perspective. This is probably one of the biggest challenges of selling your own business is we overvalue our own businesses right there. We love the members. We started the space from scratch. We did everything to make it, you know what it is today."

00:23:34,"And so we think it is the best Coworking space on the planet and another buyer is trying to negotiate and pay less, right? So they're gonna try to undervalue the things that you overvalue and there's just some human nature in there. So having a third party get involved is important. And when it comes down to it, it's like selling a house. The price is right when there's a buyer who wants to buy your business for that price."

00:23:57,"So the price is not just what you want it to be. And if that is how you look at it, then you may not end up selling your space. So if you really wanna get out of operating your space and be able to transfer the lease, cuz that's why you can't just close your business, right? If something changes in your life,"

00:24:12,"you can't just close it because you still have to pay for the lease. And so it's better to transition that business through a sale or some other vehicle. And there are other vehicles, so maybe we'll get to spend a little bit of time on that. A sale is not the only way to do it. It is one way. So what else?"

00:24:30,"So yes, post sale considerations. I've mentioned this before. You wanna think through the emotional aspects of selling your business. What will you like look like when you have sold the business? What will you do every day? Where will you work? How will you stay occupied? What happens to your identity as a Coworking space owner? Now, I still had my Coworking space in Palo Alto and I was running the Global Workspace Association at the time and getting ready to start the Coworking Startup School."

00:24:55,"I was very busy. So the, I didn't have an identity crisis and frankly, I was probably a little bit relieved to not have to deal with managing we some physical challenges with that space that made it hard to manage remotely. It was amazing. But there were some problems with the parking lot. There was problems with some signage. There were some challenges that made it not a hundred percent easy breezy."

00:25:17,"What else? Possible roles post-sale. Okay, so it may be negotiated that you stay on for a transition period. They, the new owners wanna make sure that you are there. If you need to sort anything out, explain anything, let them know how something works, give them some additional documentation, that kind of thing. So be prepared that you're not gonna just kinda walk the day that the transaction comes through and you can negotiate whether that's just included in the sale,"

00:25:43,"a certain level of support, or if you stay on as a consultant or an advisor or that kind of thing. We talked about a lot and I'm sure there's more we could talk about. So if you have questions about this topic, please feel free to reach out directly and ask. You can respond to one of our weekly emails. We love getting responses to those or DM us in the Facebook group or on Instagram,"

00:26:10,"and we're happy to cover additional topics that might be helpful here. I will mention briefly, I think this is gonna be a separate episode there, selling is one way to become less active in your business, right? There are lots of other ways you can hire a great manager. You can automate your space, you can outsource a lot of the components."

00:26:30,"If you missed my conversations, part one and part two with Brian Watson, which were the last two, two most recent episodes. If you're listening to this one, talks a lot about sort of the options around automating your space, centralizing things like marketing and tours and back office operations. So there are different ways to get those things done that might help you pull yourself outta your business without actually having to sell it."

00:26:56,"And selling a Coworking business is not always that easy, and you're probably not gonna get the return you want on it unless you are a more long-running operator with multiple locations. So you might wanna think about what are the, if you're profitable, what are the other ways to keep this business going? That's a topic for another podcast. Thank you for joining us this week."

00:27:15,"We have some great interviews coming your way next week, so if you're not already subscribed, hit that follow button on your podcast player and we'll see you same time next week. Thank you for listening to today's episode. If you like what you heard, tell a friend, hit that subscribe button and leave us a rating and review. It makes a huge difference in helping others like you find us."

00:27:42,"If you'd like to learn more about our education and coaching programs, head over to Everything Coworking dot com. We'll see you next week."

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Jamie RussoComment