Owned real estate adds a level of complication, but also a substantial number of options. While some business brokers will tell you otherwise, the business and the real estate do not need to be sold together. There are many options each with distinct advantages and disadvantages:
- Sell the operating business and keep the real estate
- Advantages – This allows you to continue to receive lease payments, creating consistent monthly income. You will also be the beneficiary of any property appreciation. This strategy can be very tax efficient for estate tax planning.
- Disadvantages – This strategy limits the cash disbursed at the time of the transaction (a substantial portion of the combined value may be sitting in the real estate). You retain risk of major repairs (most of the leases we see are NNN, but exclude major repairs such as roof repairs). Additional time needs to be spent underwriting the credit worthiness of the buyer, as you will be taking credit risk that the buyer continues to pay rent.
- Summary – This is a great strategy for sellers looking to maintain ongoing cash flow, who do not need to maximize the amount of cash received today, and believe the real estate will continue to appreciate
- Sell the operating business and real estate to different buyers
- Advantages – The highest bidder for the operating business and the real estate are not always the same, this strategy allows us to pursue the highest bidder for each distinct asset.
- Disadvantages – This takes longer, and often costs more money in commissions. While the transactions do not need to happen at the same time, they impact each other. A very high credit buyer for the operating business can increase the value of the real estate. Timing this strategy is difficult and can create more hassle than benefit.
- Summary – In dense urban environments, where there are a substantial number of distinct buyers for both the operating business and real estate, this strategy should be pursued as it should maximize value of both assets.
- Sell the operating business and the real estate to the same buyer
- Advantages – Simplicity. One transaction, with one buyer is far easier to negotiate. It is easier to determine the likelihood of close, and with fewer moving pieces it is easier to get to that close. It is also the fastest option.
- Disadvantages – A well run process will ensure both assets trade at fair market value, but it reduces the likelihood of finding an outlier bid for one of the assets.
- Summary – This is the easiest / simplest transaction. In smaller markets, this may be the only real option. If speed to close is a priority, this is a good strategy.
These are only three of the options, there are more. We work hard with our clients prior to entering our sell side process to determine what the best strategy is for that specific owner. Have questions, or want to discuss potential options, please contact us here.