I’ve been working with a number of clients recently that own the real estate used by the business. These specific clients purchased and continue to hold the real land/property within the operating business, instead of through a separate holding company.
Owning real estate within the business tends to be challenging from a business sales perspective, as it distorts the operating performance of the business and inflates company assets. If the property is not considered essentially tied to the running of the business, then it is considered redundant and associated costs or income need to be adjusted to determine true business operating income and anticipated ROI (Return on Investment), the primary focus of most buyers.
Many adjustments are required to normalize EBITDA by removing the +/- impacts of owning real estate from the financial statements (mortgage, property expenses, other rental income) and determine a fair market rental expense (FMV) for a presumed lease of similar or appropriate premises.
Normalizing EBITDA to remove the real estate impacts and separating the asset from the company can be confusing and difficult for a buyer, which could negatively impact value and transaction difficulty.
Purchasing the real estate could still be a consideration for the buyer, but the additional costs (especially at recently high prices) may be prohibitive and increased capital requirements may deteriorate ROI (Return on Investment) below target returns.
Offering potential buyers maximum flexibility is key to increasing the attractiveness of your business for sale, as:
- Some buyers will still want to purchase the real estate and own the real estate as an additional asset;
- Other buyers will want a right of first refusal to purchase the property in a few years, once the business purchase is absorbed;
- Other buyers will want a long- term lease only, with plenty of flexibility to move or consolidate operations into other locations, which provides maximum flexibility for any unforeseen economic changes.
Ideally, real estate is purchased through a separate holding company, to provide for maximum flexibility for buyers. If this is not the case, consider re-organizing your business and moving this redundant asset out into a holding company in advance of taking the business to market. There likely will be a tax impact from the ownership change, so make sure to check with your accountant first.
A cleaner business operation provides more clarity and maximum flexibility for buyers, making it a more attractive acquisition!