When it comes to selling your business, real estate can play a pivotal role in determining how a transaction is structured. Whether you own or lease your business property, the location, condition, and terms of the real estate can significantly impact how the transaction gets closed. Obtaining an independent appraisal to ascertain your property’s current value and fair market rent rates are important steps in preparing your business for sale.

One reason real estate matters is that it adds significant value to your business if included in the sale. This can make your business more appealing to potential buyers who prefer to own the property outright versus leasing it. On the other hand, some buyers might prefer to lease the property instead. Identifying these preferences early in the sales process ensures that the transaction aligns with your strategic goals and objectives when selling your business.

Financing and Sale/Leaseback

If the potential buyer acquires real estate, they may use it to secure financing for the transaction. Understanding the financing amount, annual costs, maturity date, and interest rate is necessary to ensure that the company’s cash flow can support this financing after the sale. This is particularly important if the transaction involves a seller note or an earnout structure.

Some buyers will purchase real estate as part of the transaction and then engage in a sale/leaseback arrangement with a third party. This arrangement allows them to monetize the real estate while entering into a long-term lease with the third party. Understanding the details of the lease agreement is crucial, particularly when a seller note or earnout component is part of the transaction structure, as these new lease terms could affect the company’s future profitability.

Lease Agreements

If you lease property to your business through a separate entity, ensure the lease terms align with market rates, as deviations can affect the sale price of the business. For instance, if you have a favorable lease for your business and wish to negotiate a market lease with a potential buyer, they might view this negatively. The increase in rent could affect profits, potentially leading the buyer to lower their offer for your business.

Conversely, if your lease is above market rate and you negotiate a market rate lease with the potential buyer, it could affect the sale price of the business positively by lowering the operating costs due to reduced rent.

To take a deeper dive on this topic, watch our YouTube video below.