The Value of Location: Leases, Real Estate and the Value of Your Business
Business owners often struggle to know the value of their business. After all, what is this thing they have spent so much time building over the years really worth? One of the things that makes this difficult is understanding the value of the assets your business owns, but another is the simple value of your location. We walk you through a simplified version of this process for free in our 7 Steps to Successfully Valuing Your Business program.
You’ll need a professional business valuation once you are ready to put your business on the market, but out free program will help you get organized and give you a general idea of what your business might be worth.
Your location not only impacts your business valuation, though. The lease you have with your landlord and the current location of your business could be vital to the person buying your business. It can literally make or break the deal.
If you own the property where your business is located, you have even more options. Here are some tips to ensuring the value of your location remains the same as you transition your business to a new owner.
Negotiate the Terms of Your Lease Before the Sale
As difficult as it might be to do, you need to approach your landlord or lease holder before you sell your business, and negotiate both long term rates, but also add a clause protecting the business location if a new owner takes over. There will usually be a provision that requires the lease holder to approve the new buyer if they will be taking over your lease.
Know these terms going into any sales situation. Remember the old saying about location, location, location holds true. If your buyer will have to move your business, not only will that mean the cost of the move, but it may mean lost customers and revenue. Your lease is vital to the value of your business and the selling process.
If There’s Bad News about the Value of Your Business, Share it Early
Let’s say your landlord intends to raise the lease amount on any tenant who takes over your lease, or they will require a new deposit and an entirely new lease. Even if they do not want to rent to your type of business anymore once you leave, you need to be honest about it. Will this affect your business valuation?
That depends on your type of business, but it can. The issue is that if your buyer has gone partway through the purchase process and spent time and even money on due diligence, only to find there is a lease issue, that deal will likely fall apart at that point.
The key is to be honest upfront and address these challenges as part of the purchase agreement. As long as you are on the same page as the buyer early, you’ll still be able to sell your business.
To Sell or to Lease
If you own the property where your business is located, you have some important choices, and your business broker can help you make the right ones. They also might be guided by your buyer’s preferences.
That’s because you can either sell the property to the new owner as part of the business sale or you can retain ownership of the property and lease it back to them. There are pros and cons to each, and you should consult with not only your business broker, but your tax professional too.
- Consider if you want to be a landlord. If you are retiring, you may not wish to continue with this responsibility
- Consider the tax consequences of capital gains, unless you plan to reinvest the proceeds from the sale.
- Consider the potential advantages of residual income vs. a single payout.
- Consider letting the buyer lease the property from you at a discount as a part of your negotiations.
There are other factors that might play a role in your decision as well. Either way, using your ownership of the property your business is located on as leverage can make it much easier to make a deal.
The Earlier the Better
The earlier you make these decisions about how you will handle either your lease or the ownership of your property, the better. Remember, to sell your business you must be a motivated seller, find a motivated buyer, and you must close as quickly as possible. Even though this process takes time, the more streamlined you can make the process, the less likely the buyer is to walk away and find another business to purchase.
The first step in selling a business is the business valuation. Knowing what your business is worth directly relates to your location, whether you lease the property or own it. Consult your business broker early and work out any potential problems before they become an issue to your buyer.
Need a certified business valuation? Ready to sell your business and have questions about your location and how that factors into the equation? Contact us here at Rogerson Business Services. We’d be happy to be your business broker and help guide you every step of the way.