Successful entrepreneurs frequently achieve a level of financial strength where they have the ability to purchase the real estate occupied by their businesses. The purchase of owner-occupied real estate is often a prudent business decision for an entrepreneur because it allows a business owner to control occupancy costs and build to suit a facility to maximize productivity of the company. The purchase of real estate also conveys a long-term commitment to the business. This commitment to a family owned business can span decades, but eventually “father time” knocks on everyone’s door conveying it is time to put an exit strategy in place to facilitate retirement.
IBA, as one of the few mergers & acquisitions firms in the Pacific Northwest where all of its intermediaries are licensed commercial real estate brokers affiliated with CBA (www.commercialmls.com), often has clients that own both a privately held company and the real estate occupied by the business. Our professionals uniquely have the ability to offer these clients comprehensive, experienced representation of both assets.
A privately held company traditionally requires active, engaged management by ownership. This means that a succession of ownership is needed to facilitate retirement. This is not true for commercial real estate. Real estate does not require active management. Real estate can be managed by ownership, family members unaffiliated with the business, or management delegated to a third party. This creates a menu of options for the property owner related to the real estate when they sell their business. The options are as follows:
- Sell the Real Estate – A business sale that includes real estate can be very attractive on the market. The right real estate can help the occupying business sell at a premium value and/or provide business continuity security or a competitive advantage for the company in the future. A business that includes real estate can also help a buyer obtain acquisition financing by lowering the percentage of the purchase price needed in cash to secure financing, increasing the time period the loan is amortized over, and providing collateral to secure the loan. It also should be noted that a sale of the real estate is not limited to the buyer of the business. If a strong, credit worthy buyer is found for a business who signs a long-term lease at a market rate for continued occupancy of the space, the real estate can also be sold to an investor buyer after the sale of the business. In situations where a privately held company is merged into a publicly held company, the value paid by an investor buyer for the real estate can exceed the value a buyer of the business would pay for the property. It is common for publicly traded companies to prefer to lease facilities rather than own real estate to preserve capital and allow for increased business operation flexibility.
- Lease the Property – Many business owners are looking for passive investments after they sell their privately held companies. Commercial real estate can be a wonderful passive investment offering both monthly cash flow and an opportunity for appreciation. A well-maintained building occupied by a business known intimately with a lease at present market value with established annual increases in rent can be a “golden goose” that is attractive to retain when selling a business.
- 1031 Exchange the Real Estate – Many of IBA’s clients who own the real estate occupied by their businesses own properties that have a single tenant, the privately held company being sold. Any property with a single tenant has vacancy risk if the business model struggles (e.g., consider the Sears store locations that are sitting vacant, not colleting rent for the property owner). It is common for IBA’s clients to want to retain commercial real estate as a passive investment when they sell their business, but also want to diversify their risk exposure. A common real estate strategy employed by our clients to mitigate risk is a 1031 Exchange. In a 1031 Exchange a property owner sells one real estate asset and with all or part of the proceeds from the sale purchases alternative real estate. This strategy also allows for the deferment of capital gains taxes creating an opportunity to buy more real estate than would have been possible, if the real estate was sold, capital gains taxes paid, cash deposited into a bank account, and alternative real estate investments purchased at a future date.
An example of a 1031 Exchange transaction could be the following:
The owner of manufacturing plant sells the business and the single occupant real estate. The proceeds of the real estate sale through a 1031 Exchange are used to purchase a medical office building, strip mall, or apartment building allowing the IBA client to transition into real estate with multiple tenants paying rent potentially in a location that has more opportunity for appreciation and/or is in closer proximity to their residence.
One of IBA’s jobs as the oldest professional intermediary firm in the Pacific Northwest is to provide knowledgeable, experienced counsel to our clients. We commonly say, “we provide the same counsel to our clients that we would provide to family members”. IBA is unique in the business brokerage community in that we have the ability to serve as a trusted resource to entrepreneurs on both the sale of businesses & real estate. We welcome the opportunity to present cost/benefit analysis to our clients who own their real estate regarding the options available for that asset. We do this on a complimentary basis, as all of our fees are paid upon completion of the transaction. If you own your real estate as an entrepreneur and would like to lean the current market value of your business and its occupied real estate, please contact us to schedule an introductory meeting.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.