Business Brokerage .
Steve Skrlac, MBA, CFA
sales representative
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Serving Toronto / GTA / Southern Ontario
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Selling a Business With Real Estate
Contact Steve Skrlac, MBA to sell your business & property in Ontario, Canada
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A common mistake that business owners make is trying to sell a business and a property together, as a combined package. The theory is that a buyer would come along and purchase the package deal. Sometimes this is a practical endeavour, especially when the real estate is an intrinsic part of the valuation or the operation. A golf course or a hotel or motel may be such examples. This article will briefly examine the different types of buyers profiles for businesses versus real estate and why it may be difficult to sell the two together.
Buyers of businesses have different risk profiles from real estate investors
In the small business resale marketplace in Canada, purchasers are, for the most part, looking to buy a cashflow positive business that they can run – usually as managers themselves. The objective is to own a hands-on operation that they can help to shape and grow based on their owns plans. Buying a small business is definitely not a passive investment.
A real estate investor, on the other hand, may be looking for more of a passive investment. Many investors look for a return on their capital that is predictable and they they can calculate with a fair degree of certainty into the future. When valuing a property, they might analyze the net operating cashlflow of the business and apply that to a multiple or capitalization rate to determine the value. They may also rely on comparable market data or use a cost approach.
The key is that real estate buyers differ in many ways from business buyers:
- Real estate investors (usually) are looking for more of a passive investment
- The investment criteria do not match
- The valuation methodologies are different
- The risk to reward ratios of small businesses compared to real estate differ substantially
- Financing either is a different process
Two separate transactions
To properly market a business and property, even if it is to one buyer, you should understand from the outset that it should be structured as two separate transactions. The business should have a stand-alone valuation and so should the property. The key is that you must normalize both in order to have a true apples to apples comparison.
If an owner has a business and a building with no mortgage on it, he or she may simply write off the property taxes against the income of the business. There would be no rent or interest as the property is owned outright in this example. In order to properly normalize the business profit, the financials must be adjusted to add back the property tax amount and then a theoretical rental amount must be added to the expenses. By doing this, the income statement would be normalized as to the truer economic earnings of the business and a more accurate valuation could then be done on the stand-alone value of the business.
Conversely, to properly calculate a value on a piece of property using the income capitalization method, market-based rental amounts must be used, as if they were made by a third-party in the open market. Valuing real estate on the basis of reduced rental payments coming from a related company would obviously be incorrect.
It is important to recognize that the two entities (the business and the land) should typically be treated as different entities. Work with a professional that can properly advise you on this.
Different marketplaces – one may be up and the other may be down
It is possible to be in a scenario where the market demand for your real estate is booming while the demand for your business may be lackluster. Because of this, it may not be wise to sell both at once. It is possible to sell them at different times and to try to game the respective marketplaces so you sell either when would be better to get a higher selling price.
Some Alternative To Selling Both as a Package Deal
Selling the business and leasing the property
Consider the option of finding a buyer for your business then leasing the business to them at market rates for a reasonable term. Doing this would afford you the freedom of seeking a real estate purchaser that is interested in buying an existing property with a long-term tenant in place on a lease.
Sell the business and keep the property
Another alternative is to sell your business, negotiate a market-base lease with the buyer and simply to hold on to the property and collect the income. With a lease in place, you may decide later to list the property for sale if the market values increase.
Sell the real estate and keep the business
If you are looking to extract cash from your holdings, it is an option to sell the land & building and agree on a lease agreement with the buyer, for your business to operate in the same premises. Selling real estate is also usually easier than a business.
Keep both and mortgage the assets
If you are looking to retain ownership of the assets and are looking for cash in the near-term, you can consider keeping everything and then getting a first or second mortgage on the property, or a secured line of credit. Talk to your bank or mortgage broker to determine the feasibility and payment schedule in doing this.
While selling a business and real property is done often, it is often done incorrectly. Work with Ontario real estate or business brokers with experience in such transactions and always seek the guidance of your professional advisors before committing to anything.
