In most cases when a business is sold, there are real estate considerations which the buyer and seller should consider. Whether the business owns the real estate or leases the real estate, the transaction will be affected in one way or another. Let’s take a look at some issues which can come into play.

The first thing to realize is that real estate affects buyers and sellers differently and often times in opposite ways.  This is because the economics of the real estate, lease rates, or real estate asset value, have a direct impact on the business valuation. It is for this reason that business sellers and buyers should think deeply about the real estate and what role it plays in the transaction.

Consider the following scenario- a business seller has owned the building and has been undercharging themselves for a lease for the business. This in turns makes cashflows higher than they would be in actual market rate circumstances. As a result, the seller believes their business valuation is higher than it actually is. When the market rate lease terms are exposed in the business valuation process, the seller may discover their business is worth far less than they anticipated, which could jeopardize a transaction or even the ability to sell.

In many cases, the real estate configuration is an integral part of the economics of a business and will directly affect the business valuation. Therefor it is worthwhile for a seller to strategically plan far in advance how they will position the real estate in the sale. Conversely, buyers should consider the ramifications of the real estate in order to ensure the optimal strategic arrangement for the success of the business post sale.

At Evolution Advisors we help business sellers and buyers successfully navigate the intricacies of a business transaction. Call us to today for a complimentary consultation.

 

How Real Estate Impacts the Sale of a Business