Selling Your Business: Options for Your Commercial Real Estate
When you’re selling your business, there are many things to consider. When it comes to selling associated real estate, it’s important to have a well-thought-out strategy and to be aware of the tax liability you’ll incur.
Selling your business can be a complicated process, so having a grasp of how your commercial real estate will impact the sale is important. Before diving into the effect on the sale though, you’ll need to make some decisions on how to handle your real estate assets. Given the complexity of these transactions, it’s wise to consult with professionals who can provide you with tailored tax or legal advice that is applicable to your specific situation.
Tax Implications of Selling Commercial Real Estate
Prior to making a decision to sell your commercial real estate as part of the sale of your business, it’s important to know the basics of tax implications of selling commercial real estate.
The tax obligations for your real estate transaction vary depending on the location of the property, however some taxes are applicable to everyone. One of the most significant tax considerations is the capital gains tax, which is simply a tax on the profit of an asset, like your businesses and its associated real estate.
Depending on how much your commercial real estate assets are worth, the capital gains tax could be substantial. When considering whether or not to include your real estate assets in the sale of your business, you should take into account the potential effect it may have.
The Role of Commercial Real Estate in the Sale of a Business
Before discussing a potential sale of your business with prospective buyers, you should take inventory of any real estate assets and determine what rental income or cash flow you receive from your portfolio. In the business valuation process, these assets will be taken into account with your business broker.
The inclusion of commercial real estate properties in the sale of a business is contingent upon the buyer and seller’s intent. If the seller wants to keep the properties that are generating income, real estate will not be part of the sale. However, if the owner of the business wants to completely move on from the business, the properties may be a good bargaining point.
There is no single, definitive way to handle real estate when selling your small business. The important thing is to first do your due diligence with a real estate agent or business broker to understand the options and implications of each method. In the meantime, here are some of the main options to consider.
Include Real Estate in the Transaction
If your brokerage firm can get a fair market value for the property, it may make more sense to include the real estate as part of the sale of your business. Including real estate in the sale of your business could yield a higher sale price due to the increased value of the company.
Keep the Real Estate and Lease to New Owner
Holding onto real estate assets when selling your business has many advantages. The income generated by the lease agreement for the new business owner provides a recurring revenue stream. If location is a valuable intangible asset for the business you’re selling, buyers will likely be interested in a long-term lease. Leasing the real estate, as opposed to selling it with your business, opens up the pool of buyers by reducing the cash and financing needs of potential buyers.
Lease Real Estate with an Option to Purchase
Depending on the type of business you are selling, it may make sense to lease your real estate property with the option to buy, eventually. If a new buyer is looking to purchase the real estate but doesn’t currently have enough capital for the down payment, this may be a good option to bring to the negotiating table, giving you rental income in the short term and potentially larger real estate transactions in the near future.
Lease Property and Then Sell Real Estate As Leased Investment
When selling your business to a buyer that does not want to include the real estate assets in the transaction, consider leasing your property to the business buyer with the intent to sell the real estate in the short or long term, as a leased investment. Work with your business broker to share with the prospective buyer, and your future tenant, of your intent to sell the real estate asset in a separate transaction.
Sell the Business and Real Estate Separately
There is always an option to sell your business and real estate separately. When you are working with a business broker and real estate broker, they can help you narrow down what makes sense from a financial and lifestyle standpoint.
When thinking about the order of operations, it is recommended to sell the real estate after selling your business. Selling real estate attached to the business before the sale can change the financial statements and impact the overall view of the business. If deciding to sell property separately, wait until after the sale of your business to move forward.
Real Estate Valuation During the Sale of a Business
There are multiple people involved in the sale of a business, including a business broker or appraiser and a realtor or real estate appraiser. While the business broker or appraiser looks at the value of the business and expected future earnings, the real estate appraiser will look at evaluating your real estate portfolio.
The real estate appraiser will provide a real estate value based on the fair market value. If the buyer is looking to lease from you, the real estate appraiser can provide a fair market rent rate instead of a purchasing price.
How the value of the real estate will impact the overall value of the business depends on a variety of factors. Primarily, does the real estate contribute to the company’s revenue or is the property incidental to the business? For some businesses, like restaurants or retail shops, the real estate and location are uniquely tied to the value of a business.
Consult Professionals
As a business owner, your goal has been to build and grow the business. While you most likely know everything there is to know about your business’ operations, sales, and strategy, you may need assistance with valuing and marketing your business to find a buyer. Business valuation experts and brokers have expertise in building a structured business valuation and assisting you in selling your business. Since not all states require business brokers to have real estate licenses, you’ll also want to make sure you have a commercial real estate broker on your team to handle the lease or sale of the property. If your business broker does have a real estate license, they may be able to advise and handle negotiations for your real estate transaction.
When real estate assets are a component of a business sale, it’s wise to consult a team of advisors. It’s important to have an attorney to address legal components, a real estate agent to advise on real estate decisions, and a business broker for all business decisions. Visit BizBuySell’s Broker Directory to find a broker to guide you through the process of selling your business.