InSight

Exit and Growth Strategies for Middle Market Businesses

SHOULD I SELL THE COMPANY’S REAL ESTATE WITH THE BUSINESS OR KEEP IT AS A SEPARATE ASSET?

By Terry Fick | May 30, 2017

The easiest (and cleanest”) thing to do with your real estate is to include it with the sale of your business. However, that is not usually the way to maximize your financial outcome.

Let’s first look at the purely financial aspects of keeping the real estate vs. selling it with the business.

  • It is important to recognize that most buyers of businesses prefer not to own the real estate.
  • Let’s assume you are selling your company at a value equal to 7 times your EBITDA.
  • Since the business owns the real estate, the company has no lease payments, thereby increasing the EBITDA and the selling value.
  • While Real Estate values swing broadly based on type of real estate and location, that value is almost always higher than 7 times the decrease in the value of the company that results from adding a market lease to your expenses.

EXAMPLE:

  • Assume you can lease it to the buyer for $600,000/year.
  • This reduces the value of your company by 7 times $600,000, or $4,200,000
  • However, using a recent transaction we were in, the “Cap rate” of the warehouse owned by the company was 6%, which is a multiple of 16.6x the annual rate.
  • So, he kept the real estate (Then sold it to a third party real estate investor) for almost $10 Million, but reduced the value of his business by only $4,200,000.

You might want to simply keep the real estate and generate the income from a lease (in this case, $600,000) as a long term investment. Whether you keep it or sell it separately, be sure to get a lease of at least ten years to secure the value of the real estate.

If you own the real estate separately from the company, but you want to sell the real estate, as well, the decision is reversed. Keep the real estate separate and get a good market rate lease, then sell the real estate to a third party, a real estate investor.

One caveat is that some real estate, such as a very special manufacturing facility is very difficult to sell separately, so that may be an important consideration. An appraisal on that property would definitely be in order before you make that decision.

Note that there are real estate investors that will buy even specialty use businesses with good leases. One such company we often call is AIC VENTURES in Austin, Texas.


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