World Class Mergers & Acquisitions  |  For Companies $5 Million to $100 Million in Revenue

Segregating the Sale of a Business from the Sale of Real Estate

Mike Ertel - Managing Director

By: Mike Ertel
Managing Director
Transworld M&A Advisors

If you’re thinking of selling your business and you lease the commercial real estate your business operates from, this might be a good time to re-negotiate /secure a lower lease rate in exchange for a longer lease term.  Also, consider negotiating several short options to renew your lease so that the total term equals or exceeds ten years.  Most commercial lenders will cap the buyer’s loan term at ten years, or the maximum remaining term of the lease, whichever is shorter.  Having ten years to pay it off makes the monthly payment that much more affordable for the buyer.

On the other hand, if you own the real estate inside your business, this would be a good time to segregate the real estate into a separate entity still owned by you, and have the business pay fair market rent to the new entity.  While this will lower the business’ cash flow – and the business’ selling price – it will substantially raise the combined value, since the current selling price multiple for $100,000 of business cash flow is ~2-6x, while the current multiple for the same amount of net operating income from real estate is ~10-12 times.

Separating the real estate and offering the business for sale with the option of either renting or acquiring the real estate at its current fair market value will also substantially increase the pool of buyers who might be interested in your business.  Some buyers will be more interested in acquiring your business if the real estate can be acquired as well, while other buyers will be more interested in acquiring just the business and continuing to rent the real estate.

Continuing to rent the real estate under favorable terms to the buyer of your business can also be an excellent way to supplement your retirement income.  As noted above, the current capitalization rate – or “cap” rate – on commercial real estate is in the range of 8% – 10%, which means that commercial real estate with a fair market value of $1M should yield $80,000 to $100,000 annually in net operating income to the owner; a far better return than can be realized from investing the after tax proceeds in a Certificate of Deposit, for example.

In the event you sell the real estate with the business, having the real estate in a separate entity facilitates your option to do a 1031 exchange for a like-kind, income producing property, thus deferring taxes and maximizing your near term retirement income.

If you know of someone who’s thinking of selling or buying a business and who might benefit from a free, confidential, consultation, have them contact me directly at 813.299.7862, or mertel@transworldma.com

©2017 J. Michael Ertel PA