Selling Your Business and Real Estate Together

Business plus real estate for sale

Selling Your Business and Real Estate Together

You’ve decided to sell your business and you own the building, what should you do? Should you sell just the business or sell the business and real estate together? This really depends on your individual situation.

Ideally you want to remain flexible. If you are comfortable selling your business with or without the building and land, you will widen your net to attract buyers. Some buyers, such as an individual, just might not be able to afford both the business and the land. Oftentimes, financial buyers, such as a private equity group, will only want the business. Then you have strategic buyers that will acquire your business for synergistic reasons and will want to incorporate your operation and employees within their existing location and will not want your real estate. Or, the strategic buyer may want your business as a standalone, seeing the opportunity in buying your business and real estate together.

Why Sell Your Real Estate with Your Business?

The most obvious reason is you will receive more money at closing. If you need the cash to help with your immediate financial needs, then selling the real estate now makes sense. 

Another reason to consider including the building and land in the deal is it may help your eventual buyer secure their loan. Lenders like seeing real estate in the transaction as added collateral. The buyer’s lender may be able to offer a “blend” in loan terms. If a typical building loan is 25 years and the business loan is 10 years, then the buyer’s lender may have options to improve the length of their loan to keep the monthly payments lower.

Maybe you just want to sell everything and free yourself from the hassles of ownership. If this is the case, then selling both the business and real estate is the way to go.  Just remember, by selling everything you will see a larger capital gains tax. Make sure to include your CPA in these discussions to determine your tax hit.

Why Hold Onto your Real Estate when Selling your Business?

When you sell your business, there is a good chance your monthly cash flow will be reduced. Granted, you will see a large cash infusion with the sale, yet having the steady stream of income each month may disappear. When you hold onto the real estate, you will continue to have a source of income from your tenant’s lease payments. The key is your tenant must be reliable and able to make the lease payments.

By holding onto the real estate you may see this asset improve in value. It really depends on what type of real estate you own. Currently industrial real estate is very valuable.

If you do decide to hold onto the building and land you may never want to sell, which is a smart way to leave an asset to your beneficiaries. Instead of selling while you are alive and incurring a huge tax hit, you leave the real estate to a loved one who will benefit from the stepped-up basis in value which will improve their tax situation.

Just remember, owning real estate is work. You will need to have a plan in place with your tenant to address capital improvements, if needed. You as the owner may need to cover some improvements and others you can share with the tenant.

As you make plans to sell your business, and you own the real estate, you may want to keep the business and real estate in separate entities. This keeps things cleaner when you go to sell. Putting the real estate in its own LLC is a good move. 

When you own both the business and real estate, make sure your business is paying market rate rent or more. If you aren’t, the buyer will want to adjust your selling price to cover the lower rent. 

Combining the business and the real estate in your transaction may be the best option to finding the right buyer. Yet you want to stay flexible because holding onto the real estate may provide a much better return for you in your retirement.