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 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-Step Program to Successfully Valuing Your Business.
You’ll need a professional business valuation once you are ready to put your business on the market. Still, our 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 make or break the deal.
If you own the property where your business is located, you have even more options available to you. Here are some tips to ensure 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 may be, you need to approach your landlord or leaseholder before selling your business and negotiate both long-term rates and a clause that protects the business location in the event of a new owner taking over. There will usually be a provision that requires the leaseholder to approve the new Buyer if they will be taking over your lease.
Be familiar with these terms before entering any sales situation. Remember the old saying ‘location, location, location’? It holds. If your Buyer has to relocate your business, not only will that involve the cost of the move, but it may also result in 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 for any tenant who takes over your lease, or they will require a new deposit and a new lease. Even if they no longer want to rent to your type of business 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 critical choices, and your business broker can help you make the right ones. Your Buyer’s preferences may also guide them.
That’s because you can either sell the property to the new owner as part of the business sale or 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 also your tax professional.
- Consider whether 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 allowing the Buyer to lease the property from you at a discounted rate as part of your negotiations.
Other factors may also influence your decision. Either way, using your ownership of the property on which your business is located as leverage can make it much easier to make a deal.
The Earlier the Better
The earlier you make decisions about how to handle either your lease or property ownership, the better.
Remember, to sell your business in California, you must be a motivated Seller and conduct a periodic business checkup, find a motivated Buyer, and 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 or own the property. Consult your business broker early and resolve any potential issues before they become a problem for 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 serve as your business broker and guide you every step of the way.