For owners who also own their company’s building, a business sale involves two assets with different values and potentially different buyers. In some cases, the real estate may be worth more than the operating business itself.
That creates choices. You may sell both assets together, sell them to different buyers, or retain the property and lease it to the buyer of the business. The right approach depends on your objectives and how much the company relies on its current location.
The Business and the Building May Have Different Buyers
A buyer interested in your company may have little interest in owning its real estate. Some prefer to commit their capital to the business. Others already have facilities and may eventually want to consolidate operations.
Your property may appeal to an entirely different buyer, such as a real estate investor or another business looking for space. Its value will reflect the local property market and potential uses of the site, which may have little connection to the company’s earnings.
Requiring one buyer to purchase both assets can limit your options. It’s usually worth evaluating the business and property separately, then deciding how to coordinate the transactions. Separate buyers can work well, but the business buyer still needs certainty about where it will operate after closing.
Separate Ownership and Charge the Business Rent
Ideally, the real estate is held in a separate entity from the operating business, and the business pays rent under a documented lease. This makes it easier to evaluate each asset and gives the owner more flexibility when it’s time to sell. If the building is already inside the operating company, review the structure with your tax and legal advisors well before a sale rather than assume it can simply be transferred out.
The rent should be supported by the market and reflect the lease terms, including responsibility for property taxes, insurance and maintenance. Owners sometimes charge little or no rent because they own both sides. Others set rent based on the mortgage payment or their personal cash needs. Neither necessarily reflects what an unrelated tenant would pay.
This matters when presenting earnings to a buyer. If the business will lease the property after closing, its adjusted earnings should reflect an appropriate rent expense. The property’s value should then be evaluated separately. Increasing rent may improve the property’s income, but it also reduces the operating business’s earnings. Both sides need to make economic sense.
Can the Business Really Move?
Owners should ask this question early. Equipment may be physically movable, but that doesn’t mean relocating the business is practical.
For a manufacturer, moving equipment may require requalifying equipment or validating production processes at the new location. Depending on customer requirements, imagine that could mean a new PPAP submission for every affected part. The cost, downtime and risk of interrupting customer deliveries may make a move impractical, even when another building is available.
Employees matter just as much. A buyer will want to know whether key people will stay if the company moves, particularly when skilled labor is difficult to replace. Support the answer with an assessment of where employees live and how a proposed move would affect their commutes.
In one transaction, the owner sold the business but retained their 50,000+ square foot warehouse. The buyer continues to occupy the building and has paid rent to the former owner for years. It was a very good outcome for the seller, who received the proceeds from the business sale and continues to earn rental income from a property they know well. Retaining the building can be attractive, although the former owner remains exposed to the tenant’s ability to pay and the eventual need to lease or sell the property.
In another transaction, manufacturing wasn’t the site's highest and best use. The property had greater value for another use, and the business needed to relocate within three years.
Prospective buyers were concerned about whether the employees would make the move. We reviewed where employees lived and demonstrated that they were broadly dispersed rather than concentrated around the existing plant. That helped establish that the relocation wasn’t likely to meaningfully disrupt the workforce. And we can also report, after the fact, that it didn’t.
Develop the Real Estate Plan Before Going to Market
Owners don’t need to settle every detail before starting a sale process, but they should understand the property’s value, a supportable market rent and the practical limits on relocation. They should also decide whether they prefer to sell the property or remain a landlord.
A clear real estate plan gives buyers a workable path and helps the owner evaluate offers for both assets. Leaving those questions until late in the process can turn a valuable property into a closing obstacle.