Selling Your Company: Should the Real Estate Go With It?

Owners who have run a company from their own building for years tend to think of the two as one thing. Buyers do not. A buyer of an operating company is pricing earnings, customers, people and equipment. A buyer of a leased building is pricing a rent stream, a tenant's credit and a piece of real estate. Those are different buyers using different math, and a single price for both often leaves one of the two assets underexamined.

That is why the real estate question should be settled before the company is marketed. If it is left open, it gets answered late, under time pressure, by whichever party has the most leverage at that point. Usually that is not the seller.

There is a structural point too. In some companies the operating business owns the building directly. In others the owners hold the building in a separate entity that leases it to the business. Which one you have changes what is easy, what is taxable and what needs lender consent, so start by confirming exactly who holds title and what debt sits on the property.

This is the simplest path to describe. The buyer of the business also takes the building, either inside the company it acquires or as a separate purchase on the same day.

• It works when the buyer wants to own its facilities, when the building is so specialized that it has little value to anyone else, or when the real estate is a small part of the total deal.
• It gives you one negotiation, one closing and a clean exit with no ongoing role.
• The risk is valuation. A business buyer may fold the building into its overall offer without pricing it the way a real estate investor would. Get an independent view of what the property is worth, as real estate, before you accept a blended number.
• Some business buyers, including many financial buyers, prefer not to tie up their capital in real estate at all and will ask you to solve the question for them.

Here you sell the operating company and stay on as its landlord. If the building is already in a separate entity, the lease between that entity and the company is reviewed and usually rewritten as part of the sale. If the company owns the building, the property has to be moved out of the company first, and that transfer has its own tax and transfer-tax consequences to review with your CPA and attorney before anything is signed. Transactions between a closely held company and its controlling shareholders draw careful IRS scrutiny, so the price and the rent both need to be supportable.

The appeal is ongoing income and a second sale later. The cost is that your retirement asset is now a single building leased to a single tenant you no longer control. You are relying on new owners to run the business well enough to pay rent, and you carry the landlord's obligations under whatever lease you negotiate.

• ✓Is the rent in the new lease at a market level that an outside investor would accept, or was it set to make the company's earnings look better?
• ✓How long is the term, and what happens to the building's value if the buyer consolidates plants and leaves at expiration?
• ✓Who is on the lease: the acquired company alone, or the buyer's parent with a guaranty?
• ✓Who pays for the roof, structure and environmental issues that predate the sale?
• ✓Can you sell the building freely later, and does the tenant hold any purchase right that would limit your buyers?
• ✓Does your estate plan work with one illiquid building as a large share of it?

A lease written with a future sale of the building in mind is worth more than one written as an afterthought to the company sale. That is the same lease an investor would study in a sale-leaseback, so it deserves the same care.

In this path the building is sold to a real estate investor and leased back, and the company then goes to market as a tenant with a lease already in place. The proceeds from the building reach the current owners, or pay down debt, before the business changes hands.

Three things make this attractive. The building is priced by buyers who specialize in real estate. The company's buyer sees a clear occupancy cost and does not have to raise capital for a facility. And you leave with no landlord role.

Three things need care. First, rent becomes an operating expense of the business, which lowers the earnings a company buyer is valuing. Pushing rent up to raise the building price moves value from one sale to the other, and a rent above market can cost more on the company sale than it adds on the real estate. Second, the lease must allow the company to be sold. An assignment or change-of-control clause that needs the landlord's consent, with no standard for that consent, hands a third party a veto over your exit. Third, timing matters. A sale-leaseback that closes shortly before the company sale will be read alongside it by buyers, lenders and tax advisors, so the sequence should be planned with your M&A advisor and CPA from the start.

If a company sale is likely in the next few years, negotiate the leaseback as though the future buyer of the business were sitting next to you. Term, renewal options, assignment rights and rent level will all be read in that buyer's diligence.

1. Confirm who owns the building, what debt is secured by it, and what consents a sale or transfer would need.
2. Get two separate views of value: the business without the real estate and paying market rent, and the building leased to the business on market terms.
3. Ask your M&A advisor which kinds of buyers are likely for the company and whether they tend to want real estate.
4. Decide honestly whether you want to be a landlord after you exit, and for how long.
5. Have your CPA model after-tax proceeds under each path, including any transfer of the property out of the company and state and local transfer taxes. In Illinois the state transfer tax also reaches transfers of a controlling interest in a real estate entity, so do not assume a sale of ownership interests avoids it.
6. Pick the path, then write the lease to fit it before the company is marketed.

Whichever path you choose, the lease is the document that connects the two assets. We represent the occupier, so our work in these situations is to value the building as real estate, test the rent against the market, and negotiate lease terms that the business, and its next owner, can live with.