Understanding Real Estate Sales Strategy in Business Exits
New analysis from Edison Avenue unveils that fewer than 10% of privately held businesses sell their commercial properties before selling their operating businesses.
The common practice observed across various sectors indicates that when U.S. companies that own their operational real estate go for sale, the trend leans heavily towards selling the business first or selling both the real estate and business together. Only a small fraction manages to sell the property preemptively.
Common Patterns in Business Transactions
Across industries, just an estimated 5–10% of transactions involve selling real estate ahead of the operating company, suggesting a significant misperception among business owners regarding the benefits of this approach.
Edward Valaitis, an M&A advisor at Edison Avenue, shares insight into potential pitfalls. He states, "From a buyer's perspective, selling the real estate prior can introduce unnecessary complications. It may limit the pool of interested buyers, restrict financing avenues, and compress the valuation of the operating company itself.”
Transaction Trends
Market observations reflect the following patterns:
- 65–75% of transactions typically feature the business sold first with the seller retaining the real estate for lease.
- 20–30% see both the business and the real estate sold in tandem.
- Only 5–10% involve the real estate being sold independently prior to the business sale.
The order of sales in transactions matters significantly. Buyers tend to focus on cash flow consistency and operational stability. When sellers become tenants at or before the sale, factors such as lease terms and rental rates can significantly alter the perceived value, resulting in more cautious pricing from buyers.
Sector Variations in Real Estate Sales
The inclination to separate real estate sales from business transactions is more evident in verticals where the land holds redevelopment potential or alternative use, such as various restaurant or hospitality sectors. However, in manufacturing, logistics, and service-oriented businesses, the trend of selling the building first remains rare.
Current Economic Climate and Its Effects
With interest rates rising and stricter lending conditions becoming the norm, buyers and lenders are increasingly favoring transactions with straightforward structures. Market feedback indicates that simpler deal architectures are being completed predictably and often at favorable valuations.
Valaitis emphasizes, "In our current economic landscape, the transaction structure is not just a technical detail; it’s a vital component of value." He advises that those who understand how buyers assess deals can significantly maintain their bargaining power and transaction certainty.
The Takeaway
While selling real estate first can be beneficial in certain unique scenarios, substantial market evidence suggests that this strategy is infrequent and may detract from overall value unless executed with care. For the majority of those operating businesses, initiating the sale with the business while considering the timing of real estate monetization remains the preferred and more adaptable option.
About Edison Avenue
Founded to guide businesses through the complexities of mergers and acquisitions, Edison Avenue is a dedicated advisory firm specializing in the sale and acquisition of privately held enterprises. The team at Edison Avenue comprises experienced and certified M&A advisors who deliver comprehensive services, including valuation, preparation, and transaction facilitation, aimed at maximizing business value while minimizing risks and delays. Their meticulous, detail-oriented approach offers transformative strategies that enable entrepreneurs to effectively capitalize on their businesses' wealth.
Frequently Asked Questions
What does the new analysis from Edison Avenue reveal about real estate sales?
It shows that less than 10% of privately held businesses sell real estate before selling their business, indicating it's not a common practice.
Why might selling real estate first introduce complications?
Selling real estate first can limit the number of potential buyers, limit financing options, and negatively impact the valuation of the business.
What are the typical patterns in business transactions involving real estate?
Typically, 65-75% of transactions sell the business first, while 20-30% sell both the business and real estate together, and only 5-10% sell the real estate first.
How does the economic climate impact business sales?
In today's environment, a clear and simple transaction structure is preferred, as it leads to more predictable closures and often better valuations.
What is the main takeaway regarding the sale of commercial real estate?
For most business owners, selling the business first, then deciding on the real estate, is the safer and more flexible path.
