Real Estate in M&A
From the BCC "Baton" - Volume 12, Issue 2
Depending on the type and size of a business, the associated real estate can represent a significant portion of total proceeds received when a business is sold.
When structuring the terms of a business sale, there are several considerations related to how to handle the real estate, whether selling to the buyer, leasing to the buyer (often with a purchase option), or selling to an unrelated third party.
While selling will provide higher proceeds at the time of closing, leasing will allow continued ownership of the building while generating income over time, which may be more tax efficient. The most common type of lease, “Triple Net,” provides that the lessee is responsible for taxes, insurance and maintenance costs. But there are many types, so you’ll want to understand all the terms before you choose.
Whether selling or leasing the real estate, you’ll want to factor in the structure’s impact on reported earnings. Often we see real estate owned outside of the business by the owner(s) personally or through an LLC. If you are including the building as part of the sale price of the business, but have been showing rent expense on the Company’s income statement, adding this expense back to earnings should be evaluated. This can ultimately have a positive impact on the overall valuation of the business.
When preparing to sell your business, discuss with your advisors the pros and cons of selling versus leasing real estate so you know what flexibility, if any, you have when negotiating with potential buyers of your business. This will also help determine which potential buyers will be the best fit. Our affiliate, Iowa Appraisal and Research Corporation, a commercial and farm real estate appraisal firm serving clients for over 50 years, provides BCC in-house expertise on these issues, giving us a unique advantage in helping business owners with these deliberations.