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Considering the ownership of the property on which a business operates is an important facet of selling a business. The question of who owns it and whether or not the buyer will acquire the real estate upon the close can add another level of complication to the process of selling a business. Therefore, it is increasingly important to find an advisor who is familiar with both the business brokerage and real estate industries. The following are pieces of advice that a broker may offer to someone selling a business who also owns the property on which it resides.
Depending on whether or not the business owner leases the space or owns the building, different arrangements should be considered. The buyer becomes a factor as well—sometimes the buyer will want to purchase the real estate and sometimes they prefer to rent the space from the seller. Most often, individual buyers will want to include the real estate in the business purchase, while oftentimes private equity firms may be less apt to purchase the space outright.
When a business owner also owns the land on which the business operates, he or she may not consider the cost of rent when calculating the business’s expenses. While this can make the value of the business look exceptional to an outsider, it is also misleading to the buyer to represent the financials in this way. The cost of rent will need to be added back in to the business expenses, unless the buyer chooses to purchase the real estate as well. Making special considerations for the buyer may be one way in which an optimum price may be negotiated.
In an instance where the building is only partially considered commercial real estate (for example, with apartments above the business), it is best to get in touch with someone that is familiar with business brokerage as well as selling commercial real estate, as this is a more complicated type of sale.
It is important to reflect on whether it would be more beneficial to obtain the equity from a sale, or if the seller should keep the real estate and lease to the new owner. Tax implications may play a big role in this decision. A long-term lease with the new owner may be the best way to gain more capital.
One thing to consider is presenting the buyer with a lease option, or the ability to lease until ownership. If one can avoid having the lease option taxed as a sale, then this alternative can benefit both the buyer and seller. A lease option allows the buyer to be comforted knowing that the property is not on the market and it allows them time to do due diligence on the property and ensure all zoning is up to date before purchasing it outright. Meanwhile, the seller receives all income made on the property until the buyer has bought it in full. However, a lease option commonly has tax consequences, so it is important to seek out the assistance of an advisor familiar with tax planning in order to avoid the downfalls of choosing a lease option.
At George & Company, our business brokers are also licensed real estate brokers, and would be happy to help you in selling a business as well as making a decision on what should be done with the property. Contact us today in complete confidence to learn more about selling a business.