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Selling Real Estate First: A Rare Move in Business Exits

In the world of privately held companies in the U.S., a surprising trend emerges when it comes to exiting a business. Contrary to common belief, selling the commercial real estate prior to the business itself is quite exceptional, representing less than 10% of all transactions. A recent analysis by Edison Avenue highlights this striking statistic, offering new insights into the business exit strategies that are reshaping market practices.

The Data Behind the Trend

Edison Avenue’s research indicates that a mere 5% to 10% of transactions include the real estate sold before the operating company. Instead, most owners engage in one of two predominant strategies:

1. Selling the Business First: Approximately 65% to 75% of deals fall into this category, where the business is sold while the seller retains ownership of the real estate, leasing it to the buyer.
2. Selling Both Together: About 20% to 30% of transactions involve the sale of the business alongside the real estate, consolidating both assets into a single deal.

The implications of this data are crucial for potential sellers and buyers alike, signaling a deviation from the common strategy many business owners assume is low-risk or standard.

Challenges of Selling Real Estate First

Edward Valaitis, an M&A advisor at Edison Avenue, points out that when real estate is sold ahead of the business, it can introduce complexities that may deter buyers. Factors such as lease terms, rental rates, and landlord risks become significant variables that influence buyer perception and financial evaluation. “From a buyer’s perspective, selling the real estate first often introduces unnecessary friction,” Valaitis explains, noting that it can narrow the pool of potential buyers and hinder financing options, ultimately compressing the valuation of the operating company.

Why the Timing Matters

The sequence of transactions carries weight as buyers typically focus on cash flow stability and operational continuity. If a seller transitions into a tenant role just before the sale, it raises new factors that buyers must consider, leading to a more conservative pricing approach.

Sector-Specific Trends

Interestingly, the likelihood of selling real estate first does see some variance among sectors. In industries where land values have potential for redevelopment—such as certain restaurant, hospitality, or auto locations—the frequency does increase slightly. However, in traditional sectors like manufacturing, distribution, or services, it remains quite rare for property to be sold prior to the business.

The Current Market Environment

In light of today's economic landscape, where interest rates remain elevated and financing is scrutinized more closely, both buyers and lenders are significantly prioritizing simpler transaction structures. Transactions that avoid structural complexities are more likely to close successfully and at attractive multiples. “In today’s environment, structure is not just technical—it’s a critical driver of value,” emphasizes Valaitis, indicating that owners must grasp how buyers and lenders weigh these factors during their assessment of deals.

Conclusion

While there are scenarios where selling commercial real estate first could make strategic sense, recent data suggests that such cases remain an outlier and often dilute the overall value. For the majority of owner-operators, the prevailing strategy should be to sell the business first. This approach provides flexibility in deciding how and when to monetize the real estate assets, ensuring a potentially more favorable outcome.

Edison Avenue stands as a comprehensive resource for businesses navigating these complex transactions, blending expertise and strategic insight to facilitate successful business sales while maximizing value for clients.

For more information about how to navigate business exits and real estate sales, visit Edison Avenue’s website.