The Nuances of a Simultaneous Business and Real Property Sale
A Primer for Opportunities and Challenges, as well as Top Tips to Ensure a Successful Transaction and Smooth Transition
It’s a situation that might not have as much visibility or notoriety in the real estate world, however it is a scenario that is becoming increasingly more common: a client who owns a business and the property it occupies makes the decision to sell both – at the same time.
This instance creates a dual-sided opportunity and degree of challenge for the real estate broker and transaction team that requires a number of nuances and additional considerations that go well above the typical process employed in a traditional business or property sale when conducted individually. Here are some insights from our experience to-date in successfully handling these types of transactions to ensure top profits from both sales that allow the seller to move on professionally and personally.
Why would this dual-sale scenario arise and what pro-tips can you employ to confront it most efficiently while avoiding top pitfalls and obstacles?
The majority of the time, a seller would be inspired to sell his/her business as well as the property it occupies if they did not have a family or employee or ‘heir’ willing to take both over.
Next up, what are some considerations that come into play in this situation that are distinct from a traditional real estate sale?
- Additional input, expertise, and buy-in: two separate transactions means separate tax ramifications, additional legal input, and an increasingly expert team to effectively ‘quarterback’ both transactions successfully.
- The expanded team often requires additional experts, such as an Accountant with specific business and real estate experience, a Business Broker, legal experts familiar with local and state business and real estate legislation, and others to ensure top success and a streamlined process.
- Tax considerations are also important in the initial phases of a sale, as the federal tax rate on gains can vary from 15% (long-term gains) to 35% (ordinary income rates), for example.
- Undergo a Comprehensive Business Valuation. Utilizing a Business Broker, similar to a real estate agent, it is important to ascertain the true value of the business and its assets prior to placing it up for sale. This includes:
- Tangible Assets, such as furniture, real estate, inventory, fixtures and equipment; and
- Intangible Assets, including trade name, contacts, leases, client lists, recipes, and patents.
- Assets or Stock? Determining this also affects how the sale will progress.
- Ensure there is a License to Sell a Business in Place. This varies state-by-state and essentially means that prior to proceeding with the marketing and sale of the business it is necessary to ensure your consultants are qualified to handle the transaction and fulfill your fiduciary duty to the seller as governed by your local legislation.
- As a corollary to this, it is important at this initial juncture to determine the structure of the business as it exists prior to sale, i.e. is it an LLC? An S- or C-Corp? Sole-proprietorship?
- Also, how is the property owned? Personally or under the business entity?
- Are there any bank loans or liens against either the business or the real property.
These factors are important in determining the way the transaction for sale must be structured and to determine if any additional tax ramifications will apply.
With this in mind, here are some of our Top Tips to achieving a successful dual business and real property sale:
- Target Potential Buyers amid a Larger Transaction and Smaller-than-Usual Pool of Prospects.
In these types of transactions, it is important to remember that, unlike a single transaction sale, you’ll be likely dealing with larger overall purchase prices and a smaller pool of potential buyers. This is because the amount of buyers that would be interested in taking on both the business and the property it occupies will always be significantly smaller than the population interested in either the business OR the property, separately. This fact will require attention and focus on targeting prospects that have the capacity to purchase both offerings.
- Don’t Ignore the Curb Appeal.
A basic principle across the real estate industry, and a best practice that is even more important here in the case of a dual sale. Making the business appear as well-run and organized as possible, along with similar care to the real property, will drive optimal returns in the valuation you can command.
- Keep the Personal Nature of a Business Sale in Mind.
When selling a business, particularly a service organization, it is critically important not to ignore the ramifications a new owner and management could have on the business’ prior customers. In order to minimize attrition a transition plan or ‘Goodwill’ process that would involve the seller/prior owner’s involvement for a period of 60-90 days following the closing can help to smooth the waters and set the new buyer up for success.
While there are many approaches and structures that can be implemented in the case of a dual-sale transaction, the fact remains that in these situations, stakes are higher, buyer pools are smaller, the sales cycle is longer, and the effective process takes an even larger and more specialized team of experts.