Should a business opportunity offering include the real estate?
There are no right or wrong answers to the question about whether the seller of a business should include the real property, or sell the company only and continue on as the landlord/lady.
This question was posed to our panel of experts and we got a diverse range of suggestions and ideas, demonstrating that the solution to this puzzle depends on circumstances and requirements of the parties.
Roseville attorney
Joe Sandbank pointed out--as did other panelists--that including the property in the deal “should increase the number of potential buyers.” And Joe commented, along with other panelists, that “including the real estate will make it easier for potential buyers to obtain financing, as many SBA lenders are not interested in doing loans unless the real estate is included.”
An explanation of this was offered by
Randall Barondess, Director of Troop Business Services and Commercial Brokerage in Westlake Village: The “S.B.A. looks favorably upon real estate tied to business acquisitions, due to collateral.” He said the ability to add real property collateral along with the business assets to secure a loan “will certainly make it more appealing to the S.B.A.”
A reminder about getting purchase money from an SBA-backed lender, was offered by
Matt Coletta, Managing Partner of Business Team in Woodland Hills, who observed that “The business will, of course, still need to generate positive cash flow to substantiate the payments.” And Matt’s strategy was this approach: “Giving the buyer the choice (with or without the property) will increase your odds in selling the business.”
Another idea, from
Patrick Marsch of First Choice Business Brokers in San Diego, was to “consider a short term lease on the real estate to achieve the desired business price, while giving the seller some attractive tax advantages.” Behind this suggestion is Patrick’s observation that “The commercial real estate market is down right now, so the appraised value of the real estate is down. You can use this lease term to bridge this down market.”
Attorney Sandbank also noted there are tax implications for a seller who includes the real property in a deal, and he advised that the business owner talk to “your CPA to determine the after-tax consequences and your investment options based on both selling and keeping the real estate.”
A useful suggestion from
Joe Atchison, a Riverside County based broker of the Sunbelt Network, was to “list the business with an asking price not including the real estate, but say in the Business Summary that ‘real estate is available for fair market value.’” Joe stressed the importance of getting an appraisal on the real property. And he noted that “some buyers will only purchase a business if they can also buy the real estate.” Included in the types of enterprises that are more appealing with their property, according to Joe, are “gas stations, day care centers, self storage facilities and specialized manufacturing businesses.” He added that “a buyer with a 1031 property exchange requirement” also will want the real estate to be part of the package.
Among Joe’s suggestions was that offering both real and personal (business) property “gives the business sellers a lot of pricing flexibility in that they can discount the business in exchange for top dollar for the real estate…” or visa versa. And he made a good argument in favor of keeping the real estate by noting that if the seller still holds the real property, it’s easier to take the business back from a buyer who defaults on an obligation to that seller.
To
Taj Randhawa, at RE/MAX in Fresno, inclusion of the real property is a necessity for a buyer who wants to get purchase money funds from a lender. Said Taj: “To get a business loan without real estate is like finding water on the moon!” And he observed that “no bank is doing any loan with 35% down without secured real…property collateral.”
Following is the question that a BizBen visitor posed to the Panel of Experts, and the responses, edited for clarity, from some panel members.
“I am thinking of selling my business but I also own the real estate where my business is located. Is it a good idea to sell the real estate with the business? Are more buyers looking to buy a business with the real estate? How will having real estate (or not) affect potential buyers seeking financing to buy my business? Some feedback on this issue would be nice since I am about to put my business up for sale and debating whether to include the real estate portion."
Here are the details from our panelists:
“Most business buyers do not want to, or cannot afford to buy the real estate utilized by the business. However, some buyers will only purchase a business if they can also buy the real estate. Gas stations, day care centers, self storage facilities and specialized manufacturing businesses are some businesses that fall into this category as well; and a buyer with a 1031 property exchange requirement.
Most business owners that I have worked with wanted to keep the real estate, lease it to the buyer and benefit from the future appreciation on the real estate. That strategy did not work out well for recent sellers due to the collapse in commercial property values. More buyers will want to purchase property now that values are down but, on the other hand, financing is more difficult so fewer will be able to quality. Owning the real estate gives the business seller a lot of pricing flexibility in that they can discount the business in exchange for top dollar for the real estate or get top dollar for the business for a below market lease rate or sale price. The SBA is now guaranteeing 90% of a real estate transaction with no SBA fees. The SBA’s 7(a) business acquisition loan program and their 504 commercial real estate acquisition program have been described as “the only fiscal stimulus that small business is going to get.”
My suggestion is to list the business with an asking price not including the real estate but say in the Business Summary that ‘Real estate is available for sale at fair-market-value.’ Do get an appraisal on the real estate so you will have an answer when asked about the real estate asking price but do not advertise the number. Of course, if the real estate does not appraise at the agreed upon sales price the buyer will want a reduction in the price. Show a lease rate in the Business Summary that is at market and indicate flexibility on price and terms such as: ‘X,XXX square foot facility owned by seller who will write a new market rate lease ($X,XXX per month, plus NNN) with flexible terms and options in an effort to meet the buyers needs.’
You probably know that commercial lease rates are in a free-fall so they will likely be lower when you get a serious buyer. Revise the Business Summary when/if you learn that the going lease rate has changed. You can get the buyer out quicker if he/she defaults on a seller note if you are also the landlord. Be sure to have an ‘Assignment of lease for security’ clause in the sales agreement. And, of course, if the business is sold with a seller note, you will want a personal guarantee from the buyer and should file a UCC-1 on the assets of the business. Landlords kill a lot of deals so, if you are the landlord, you avoid this third party risk and can be more flexible and creative with the terms of the transaction.”
Joe Atchison, Sunbelt Network, Riverside County
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“Depending upon how you structure your financials, the business could be worth more money with the real estate. S.B.A. looks favorably upon real estate tied to business acquisitions due to collateral. Will certainly make it more appealing to the S.B.A.”
Randall J. Barondess, Director, Troop Business Services, Westlake Village
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“The value of the business and the value of the real estate are obviously handled separately. It is important to note that the business will need to show payments of fair market rent in the expenses for the business to the owner. If not this will need to be adjusted. I advise my clients to offer the real estate both for sale or for lease. I would determine a fair market value for both. Some buyers are interested in only leasing and not buying the real estate. When a buyer purchases the real estate, a lender will be more inclined to provide financing for the transaction. The business will of course still need to generate positive cash flow to substantiate the payments. If the buyer of the business decides to lease the real estate, then the seller can look to sell the property to an investor with that lease in place. Giving the buyer the choice will increase your odds in selling the business.”
Matt Coletta, Managing Partner, Business Team, Woodland Hills
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Yes, yes and yes. All things being equal, real estate attracts a far greater population of buyers. Financing is also easier with real estate as part of the package. When negotiating the ultimate deal, consider a short-term lease on the real estate to achieve the desired business price while giving the Seller some attractive tax advantages. The commercial real estate market is down right now so the net effect is that the appraised value of the real estate is down. You can use this lease term to bridge this down market.
Patrick Marsch, First Choice Business Brokers, San Diego
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Its all depends upon business financials too. If his business is showing great cash flow and buyer is experienced and strong financially and credibility-wise, then he can be qualified for a business loan. Otherwise to get a business loan without real estate is like finding water on the moon! Best idea is to sell with real estate and there are better chances of selling easily with 20-30% down. Even if the business is strong financial-wise, and showing good income, the buyer still has to come up with 50% down these days. No Bank is doing any loan with 35% down without secured real estate or property collateral !!
I hope the seller knows his business's paper work well to make a decision now!
Taj Randhawa, RE/MAX, Fresno
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"My recommendation would be to first discuss the matter with your CPA to determine the after-tax consequences and your investment options based on both selling and keeping the real estate. If the question remains after that consultation, you should consider making it an option for buyers to either purchase or lease the real estate. This should increase the number of potential buyers. Also, including the real estate will make it easier for potential buyers to obtain financing, as many SBA lenders are not interested in doing loans unless the real estate is included."
Joe Sandbank, Attorney, Roseville
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About: Peter Siegel is the Founder & President of BizBen.com. He consults with business sellers, business brokers, and agents on marketing & advertising strategies when selling businesses and has written three books on how to buy & sell small businesses. If you have a question about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.
Watch for more blog posts answering viewer questions in the future!
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