If you're considering selling your company, you may also be wondering about selling its real estate.
If you’re leasing your business’s real estate, whoever buys your business will simply take over the lease once the deal is done.
But what are your options if you or an LLC you manage owns your real estate?
Is being a landlord to your business’s new owner worth the rent you’ll collect in the coming years? Or does receiving a lump sum and a clean exit sound more appealing?
Maybe there’s another option you’d rather consider.What's right for you depends entirely on your goals after you sell the business.
If you’re not sure how you want to handle your business’s real estate when it comes time to sell, you’re in the right place.
In this blog, we’ll lay out your options and give you some considerations to help you decide which path is best for you.
Let’s get started!
Disclaimer: This article is not intended to provide legal and/or tax advice. Every business transaction is unique, and buyers and sellers should always consult with the appropriate professionals (attorneys and accountants) when considering a business acquisition/sale.
Keep or Sell Your Real Estate?
The first decision you have to make regarding your business’s real estate is relatively simple. Do you want to be a landlord or not?
Depending on where you are emotionally, remaining tied to your business’s real estate could prove to be more of a hassle than it’s worth.
When you’ve owned a business for years, it can be hard to keep yourself involved as a landlord while someone new occupies the space where you made so many memories.
If you’d prefer to cut all ties to your business when you sell it, or if you simply prefer to collect a lump sum and invest it elsewhere, then selling your business’s real estate is likely the best option for you.
Let’s take a look at some the options you have if you'd prefer to sell.
MIDSTREET TIPIf you set up a triple-net lease with automatic rent escalations, you can be highly disconnected from operating the real estate. If theyre a licensed real estate agent in your state, talk to your broker about setting something like this up.
Sell to the Buyer
The easiest option for selling your business’s real estate is selling it to the buyer of your business.
This gives business owners security knowing they can continue operating on the property without worrying about lease renewal or the property being sold.
Instead of throwing rent away, they’ll also benefit from building equity in the real estate, and often reduced monthly payments, depending on the economic environment.
There are cases, however, in which the buyer of your business will not want to buy your business’s real estate.
Some individual buyers don’t want to (or more likely, can’t) tie up too much capital in a down payment right after buying a business. It can also be as simple as the buyer’s personal preference to rent as opposed to own the real estate.
Other buyers, like private equity groups, normally won’t be interested in buying your real estate. This is because they are typically planning on selling the business in three to seven years and would prefer to rent the property instead.
This makes more sense for them as they prefer to expense a lease payment rather than the interest on a mortgage payment to minimize tax liability.
NOTEIf you do sell your business's real estate, there is also the potential for a 1031 exchange, which can be advantageous if you'd like to use your proceeds to invest in more real estate.
So, if your buyer wants to purchase your real estate, great! That’s usually the simplest route to take if it’s an option.
But what happens if your business’s buyer isn’t interested in buying your property?
Sell to a Third Party
If you’re selling your business to private equity, or if the strategic or individual buyer you’re selling to prefers to lease the property, a good option can be to enter a third-party sale-leaseback arrangement with a real estate investor.
These investors can range from mom and pop investors to public real estate investment trusts such as Store Capital.
In this case, a third party unassociated with the business transaction buys your real estate and enters into a lease agreement with your business buyer.
This can be a win-win for you and the investor because you can maximize the value of your real estate by selling to them, and they can take advantage of favorable lease terms with the business buyer.
Depending on your situation, you could end up selling to the buyer of your business, or a third party. It all depends on if your business attracts individual, strategic, or financial buyers (or a mix of all three). But what if you don't want to sell your real estate?
Lease to the Buyer
Leasing your real estate to your buyer is a straightforward option, but one that could be beneficial if you want to continue owning the real estate and collect monthly lease payments.
It’s also possible you want to invest part of the proceeds from your business into other real estate, but you aren’t sure how you feel about being a landlord.
In this case, trying your hand at being a landlord to the buyer of your business could be a way to see if real estate investing is something you’d actually enjoy. Confirm with your attorney, but chances are, you’ll be able to sell the real estate at a later date anyway.
If you decide to lease to the buyer, remember: you no longer own the business. If you think it will be difficult to regularly witness the new owner making changes during your time as landlord, it’s probably best to sell the property.
Lease with the Option to Purchase or Right of First Refusal
In many cases, a buyer would like to own the property eventually, but needs more capital than they have on hand to grow the business after a purchase. In this case, you could lease the property to the buyer with the option to purchase or offer a right of first refusal.
Leasing with the option to purchase allows you to collect rent while a buyer gets together the capital to buy your real estate, or make enough payments to own the property outright.
A first right of refusal gives the buyer the first chance at purchasing your real estate should you decide to sell it in the future.
These options leave the possibility for a real estate transaction on the table without requiring either party to fully commit immediately after the business is sold.
Another option for your real estate is offering seller financing to the buyer. In this case, the buyer would submit a down payment and then pay off the rest of the real estate to you over an agreed upon period of time.
We’ve seen sellers agree to financing terms from seven to fifteen years. It all depends on the buyer’s access to capital.
This could provide tax advantages because you won’t be receiving the selling price of the business all at once during a year in which you are likely in a higher tax bracket.
While the information above illustrates the different options available for handling your business’s real estate, you may still have questions. Here are a few that we’ve been asked throughout the years:
1. Who handles the sale of my business’s real estate?
We recommend working with a commercial real estate (CRE) broker. If your M&A advisor is licensed to sell real estate, familiar with the market, and can pull accurate comparable sales data, we recommend using them because they understand the discretion required in a sale.
You can always hire a 3rd party appraiser (MAI preference) if you’re worried about leaving money on the table with the sale of the building.
If you do choose to work with a CRE broker, make sure they understand the need for discretion/confidentiality.
2. How is real estate taxed in a business sale?
Always consult your CPA to understand your tax liabilities. In our experience, you will be required to pay taxes on any federal capital gains, state capital gains, net investment income, or depreciation recapture associated with the sale of your real estate.
To defer taxes on the sale of your real estate, you could execute a 1031 exchange.
3. Is a business’s real estate part of a business valuation?
Typically, the answer is no. Your business’s value is based primarily on its earnings, and your real estate is valued separately.
4. Should I be paying myself rent? How much?
If you own the real estate associated with your business in a separate company or personally, make sure to pay yourself a market rent.
Handling Your Business’s Real Estate
Handling your business’s real estate can be tricky because of all the different ways sales and leases can be structured.
Now that you know more about how real estate is handled in a business sale, you can begin deciding which option is best for you.
If you’re interested in collecting rent payments from your business’s buyer, then keeping your business’s real estate after a transaction could be a great option.
If you’d prefer to cut all ties with your business and invest your money elsewhere, then selling to the buyer or a third party will likely be your best move.
Or, if you’re stuck in the middle, you can always hold on to the property and give the buyer a first right of refusal, so that if you do decide to sell, they can be first in line for purchase.
If you still have questions about your business’s real estate, contact us today. At MidStreet, each of our M&A advisors hold real estate licenses and have the knowledge to lead you in the right direction.