Due-Diligence Guidelines for Buyers to Follow for a Successful Self-Storage Acquisition

If you’re interested in self-storage investing, there are many benefits to buying an existing facility, from better financing options to an established tenant base and cash flow. However, the success of any acquisition greatly depends on a comprehensive analysis of the business known as due diligence. For you as the buyer, this process verifies that you’re getting what you think you’re getting. It also ensures you’re paying a fair price, uncovers potential risks and issues, and increases the likelihood of satisfaction with your purchase. 

That said, due diligence can be complex and intensive. Following are helpful guidelines to use as a reference. It’s also wise to seek counsel from your attorney and accountant, who can help you identify areas of concern. 

The Market 

There are many questions a self-storage buyer should ask during the due-diligence process to determine why the seller is selling, how the seller currently runs the facility and the overall value of the business. You want to ensure that you’re inheriting a quality investment and not lingering problems. Here are a few inquiries that’ll help determine the state of the market: 

The Customer Base 

Where are most of the self-storage facility’s tenants located? Generally, the more diverse the customer base, the better. Concentrations always increase the risk, even with top-quality renters. You also need to know the facility’s customer-retention rate and overall level of tenant satisfaction. 

Seasonality and Cyclicality 

Ask the seller for a quarterly historical pattern of revenue for the self-storage facility you’re considering, then ensure there’s enough working capital in your budget for seasonal fluctuations. If you purchase the business, you might consider building a waitlist, so that when demand wanes, you have a pool of prospective tenants to call as units become available. 

Also, how susceptible is business to an economic downturn? One way to gauge this is by asking for financial statements from 2007 to 2010, then review the impact from the last significant recession. Can the company survive a similar decline in profit from its current run rate once the acquisition debt is added? If the seller doesn’t have records from that time, investigate the typical cycles of the customer base. 

Rent 

Pull a facility rent roll to understand which units are occupied and vacant and what rents are being charged on which sizes. What’s the facility’s physical and economic occupancy? Has the seller kept any units for personal use or rented them out to family and friends at a reduced rate Also, find out what rates you can expect to charge based on the market. 

Ask when rents are due. Does the seller use anniversary billing, or are all rents collected on the same day? You may need to negotiate prorated rents at the time of closing. Also, examine how many tenants are on autopay with a credit card and how many pay with cash, as that’ll impact the way you run the business moving forward. 

Finally, what percentage of current tenants are delinquent? Be aware that the seller may not stay on top of collections leading up to a sale. Throughout the due-diligence period, ask for updated management-summary reports and watch for a sudden increase in delinquencies. 

Revenue 

To verify revenue, at a minimum, get your CPA to conduct a reconciliation of the business deposits from copies of the bank statements during the last year. Compare those against the reported cash from the same timeframe. A seller overstating their revenue or customer base are common complaints we hear from self-storage buyers. One solution is to collect transcripts from the Internal Revenue Service to verify the seller’s tax returns, but more due diligence is needed to confirm that those numbers are accurate. 

Net Operating Income (NOI) 

Most self-storage facilities are valued via a capitalization rate, which takes into consideration the business NOI. The NOI is calculated by taking the net income of the business and adding back interest, depreciation, amortization and any non-recurring expenses. 

A vital piece of due diligence is verifying any adjustments to the reported NOI. Many are valid, however, they must be quantifiable and verifiable. For example, the seller's salary (assuming they are leaving the company) is a legitimate addback. It can be quantified and verified through the company's tax return, payroll journal or W-2. 

Staff 

What has been the seller’s role in the self-storage business? If they’ve been passive, the sale may be imperceptible to the facility’s tenants. However, if they’ve been hands-on, a plan to introduce you as the new owner can help facilitate a smooth transition. 

You also need to understand the overall staff situation. Find out: 

Beware if a seller or broker limits your access to key facility employees during the due-diligence phase. This is a key part of the process. While it’s unlikely that you’ll get unlimited access, you need to be able to ask the staff questions prior to closing. Work with the seller or their representative to set a mutually agreed upon time for this inquiry. These conversations should occur early enough in the process that the deal structure can be adjusted if your support team (attorney, accountant, lender) identifies a significant risk. 

Equipment 

Conduct a physical inspection of all equipment. Is everything in working order? Is a clear equipment list included in the purchase agreement? 

Working Capital 

In almost all cases, the seller retains all cash in the self-storage company and pays all funded debt prior to the sale. Therefore, once you purchase the facility, it’s up to you to determine how much working capital you’ll need to get through the first few months of operation. You’ll want peace of mind that you’ve accounted for the possibility of tenant income not being sufficient to cover expenses and acquisition debt. Once you’ve determined that, make sure the working capital is included in your acquisition financing or be prepared to cover that cost personally.  

An Informed Decision 

Once the due-diligence phase concludes, you should have a clear understanding of whether this self-storage facility is a good investment or one from which you should walk away. This critical component of the acquisition process allows you to fully understand the business. While you may never find a perfect deal, you can identify risks and properly mitigate them before buying. Due diligence can also help you negotiate the purchase agreement and set yourself up for a smooth ownership transition. 

Anna Taylor is head of self-storage lending at Live Oak Bank, where she’s worked since 2013. A subsidiary of Live Oak Bancshares Inc. and headquartered in Wilmington, North Carolina, the company serves small-business owners in all 50 states. Anna has 11 years of experience with Small Business Administration lending. Since 2015, she’s focused exclusively on lending to self-storage owners for acquisitions, refinances, expansions and new construction.