When business owners are trying to sell their businesses with land and buildings, they usually have issues with whether to leave the real estate and sell the company or sell both separately. There are many issues that you have to resolve. Business owners in this position have a lot of questions that need answers.
The first step would be to realize the options that are available to you. You should start with your property value and your tax liabilities. You need to also consider your goals, what you really want. Do you want to retain your rental income or you want immediate liquidity? These and many more are the things you have to put into consideration.
Valuing Your Land and Buildings
Before you start to consider whether or not to include your real estate in selling your business, one important detail that you should note is the value of your property.
It will be much easier for you to determine the value of the land and buildings if a separate entity owns the property. The expenses and revenues of the properties are recorded separately in the income statement of the entity that owns it. Use it to easier evaluate the land and building separately from the business you want to sell.
However, if you are trying to sell a company that also owns the property, then you have more work at hand. In this case, you have to determine the expense and revenue separately from your company. This will require you to bring in an independent evaluator to determine your real estate value. You also have to discuss taxation with a tax advisor to know how your entity is taxed. There are different tax implications you might face based on the structure of your entity.
When it comes to valuation, one point you can start from is applying the capitalization rate to your market rent. For instance, if you are paying $150,000 rent annually with a cap rate of 7%, your property valuation will be estimated at about $2.1 million. You also have to put into consideration other factors such as the condition of the building and location. Try to renovate it as much as you can. All of this will affect your cap rate, and a professional realtor will be of help here.
Retaining the Real Estate or Selling it?
This is the major problem that business owners face in this situation. After you have determined the value of your land and buildings, the next question that needs answering is this. Do you want to sell the property as part of your business transaction or you want to retain it as a separate entity? The truth is both options have their pros and cons.
If you want immediate liquidity, then you can include your land and buildings in the business. But if you retain the real estate then you will keep getting rental income for as long as you own the property and you'll be able to reap the benefit of its appreciation when you choose to sell it. When it comes to appreciation, things do not always go as planned. This is because the price for real estate is not always on the rise.
When it comes to selling properties, you also have to consider the preference of the buyer. There are buyers who do not really want ownership of the property, and they only want a lease. If you are to force them into buying the land and property, this might lead to some disagreement during the negotiations.
If you are in a situation where you are willing to sell your property but your buyer is not willing to buy, then you need to find other solutions. Try to think creatively. One thing you can do is to sell the real estate to an interested party, who would in turn lease it to the buyer.
But if you decide to sell your business and retain the property, you can also lease it out to the buyer. However, you must go into an agreement with them. Since the property is owned by your business, it is unlikely that you don’t have a detailed lease because your company runs all repairs and expenses. But the moment you lease it to your company’s buyer, you both have to be clear on whose responsibility it is to bear the expenses and other costs, especially if the buyer has to make changes to the property.
When you make the draft for the lease agreement between you and the buyer, ensure that the market rental rate that is adopted is fair to you. If you offer a lower market rate than you should, the estimated value for the real estate will be lower than it should be when you finally decide to sell it. If you were also paying rent more than the market rental rate, it might be beneficial for you to give a fairer market rate to the new tenant.
It may be of advantage to you if you give the new business owners the market rate but you paid more than the market rental rate while you owned the business. This means that you are able to send an add-back to EBITDA, and be credited for the low rental rate. Because you are getting multiple EBITDA payment, a $100K reduction in annual rent is multiplied by a valuation multiple and this can boost the value of your property by as much as $500K, depending on the valuation multiple.
Which Am I to Sell First, the Properties or the Business?
If you are going for immediate liquidation, that means you are selling both the business and the land and building. But in this case, you might want to ask which of them should you sell first.
Before you go ahead and sell your property, you have to wait till your business is sold first. This is even more important if the success of the business depends on its location, especially with retail businesses or businesses that require special licenses based on location.
An example of a business like this is an autosupplies store. It would be difficult for the business to get permission to operate in a new area that is fully residential. But offering the buyer the chance to also buy and own the property may interest them and increase your business value.
Do You Need a Real Estate Broker or a Business Broker?
This is a question that business owners tend to ask. However, since you are selling a business with land and buildings, you will be better off working with a business broker that has a license for real estate. There are two reasons for this. First, the decision of the buyer to buy your business is purely commercial. Second, is still may be uncertain whether they are willing to purchase the property as well.
A business broker will have what it takes to help you sell both the business and the land and buildings (that is if you are willing to sell both). But this is an expertise that is lacking in many real estate brokers. Most of the time, they also do not work with buyers that are interested in buying a business, so they also lack contacts for your business sale.
Since you are selling two different entities, you need to get a broker that can handle both effectively for you. That is where a business broker that has a real estate license comes in. Settling for a real estate broker instead will limit you on many fronts.
Related: Talk to a Broker Near You
Valuing a Business With Properties
As stated earlier, you have to determine the value of your properties before you decide whether to also include it when selling the business. But if you have already decided to sell both and you are trying to know the total valuation, it will be wrong to value them together. You have to determine the value of the land and buildings and the business independently.
In most cases, business owners bought their lands and buildings many years ago, and the amount they are selling it for now is multiple times higher than the price they paid for it. In order to value a business, appraisers utilize their mortgage expense or rents, update extra expenditure (which may be higher property taxes depending on the sale price), and recast the expenditure related to the property on the income statement of the business. With the recast income statement, they are able to determine the value of the business.
Get a Property Appraisal
If you are really going to sell a business with lands and buildings, then it is necessary for you to get an appraisal for your commercial property. There is a couple of reasons why you need to do this. First, your asking price for the property should be based on an appraisal. The buyer could totally lose interest in the deal as a whole if the price of the real estate is too high. Secondly, the buyer might need to take a loan or get a mortgage and all of this require an appraisal of the property. You will need to re-negotiate the price of the lands and buildings if they are deemed too high, otherwise, the deal might not go through. Lastly, you need an appraisal of the property so that you can be sure that you are not pricing the land and buildings too low. This will mean that you are the one at loss in the deal.
Early Preparation Brings Success
Situations like this require that you plan for them diligently. This means that you have to plan ahead and as far as possible. When you start to make your plans early enough, you are able to consider different scenarios that will allow you to structure your deal better. But if you wait till the last minute before you start planing and you start to hold hasty discussions about your company asset or the property, you may end up overlooking a good option in your effort to get the deal over the line.
Real estate transactions can be very tricky. So, you do not do them hastily. Apart from getting a good valuation for your property, you have to consider other analyses such as the environmental analysis as well. These analyses might take a month or more.
So, the best route to success in selling a business with real estate is to take your time to plan properly. This will allow you to leverage your asset valuation to the maximum and also make a deal that is good for both parties.
Leon Collier is a blogger from the UK who works at Rush Essay. He loves to write about everything: pop-culture, history, travel, self-development, education, and marketing. When not writing, you can find him behind a pile of books, he loves to delve in. Follow him on Twitter @LeonCollier12