“What Happens to the Real Estate When I Sell My Business?”
At Catalyst, we are committed to providing you and your business with practical and proactive advice, regardless of whether you’re still in growth mode or have decided it’s time to sell. If you are in the latter stage and working on a succession plan, there are multiple scenarios to consider if you own the real estate utilized by your business (the “Real Estate”):
• The Real Estate is generally either sold concurrently with your business (the “Business”) or else retained, which allows you to receive ongoing cash flow in the form of rental income. Your personal objectives and current market circumstances will ultimately shape your preference.
• More often than not, we find that those who may be interested in your Business will not want to purchase the Real Estate – it can significantly add to the purchase price, it is often viewed as an investment outside of their core business, or the purchasers may possibly have future plans for the Business that do not include the Real Estate. However, if your real estate is highly specialized and forms an integral part of the Business – such as a car wash or motel – then it is more common for it to be included in the sale.
• Regardless, it is important to determine the current market value of the Real Estate by way of an independent, third party appraisal (the “Real Estate Appraisal”) as you prepare for the sales process (an environmental site assessment may also be required). Note that this Real Estate Appraisal is different from the valuation of your Business, and business valuators are generally not qualified to conduct real estate appraisals (or vice versa).
• If the Real Estate is owned personally or in a separate holding company, the sale is generally a more transparent process as any revenues or expenses related to the Real Estate are not included in the profit and loss statement of the Business (the “P&L”). Provided that there is a rent expense paid by the Business that is reflective of current market rates (which will be determined as part of the Real Estate Appraisal process), then the value of the Business, which will not include the Real Estate, can be calculated (the “Business Valuation”).
• However, if the Real Estate is owned by the Business, then you will have to make normalizations to your P&L that removes any real estate related revenues or expenses. You will also need to allow for a “notional” rent expense that would need to be paid by the Business as if it does not own the Real Estate (again, using the results from the Real Estate Appraisal process), then the Business Valuation, which again will not include the Real Estate, can be calculated.
• If the Real Estate is not to be included in the sale of the Business, you will want to enter into a formal lease – at current market rates and with other commercial terms – with the purchaser. Going forward, this will provide you with monthly cash flow and the potential for future capital gains, as well as portfolio diversification of your personal net worth.
• Your total value as owner is comprised of the Business Valuation and the Real Estate Appraisal, and you will want to work with your professional advisors on structuring the transaction and the resulting tax implications.
In conclusion, you have a number of options for the Real Estate when considering the sale of your Business, and advanced planning should allow you to maximize value while achieving your personal objectives.
Article written by:
David Laycraft P.Ag., MBA, CMC, CBV, CF, CDFA
David has over twenty years of diversified experience working with privately-held businesses, and regularly assists clients in identifying, measuring, growing and realizing business value.
David can be contacted at (403) 750-7685 or send us a note at firstname.lastname@example.org