What Happens to Real Estate When You Are Acquired?
MERGERS & ACQUISITIONS
Most lumber deallers that we speak with about mergers and acquisitions own the buildings and land where their businesses operate. Sometimes a separate LLC or incorporated business owns the real estate; sometimes it’s owned by the business; and sometimes the business owner, owns it personally. In any event, most businesses pay rent to themselves or to their own real estate holding company.
No matter how the real estate is held, most businesses that want to be acquired usually desire to sell the real estate with the business, as part of one clean package.
There’s only one problem.
Most buyers want to acquire your business for the cash flow. They don’t want to invest, say, $1 million or more in real estate that doesn’t contribute meaningfully to their earnings. Most will resist “becoming their own landlord.” Who can blame them? Parking that much in real estate makes that portion of their investment, essentially, dead money.
So, when preparing to sell your business, it usually applies that you should create an LLC or corporation that owns the real estate separately from the lumber and building material operations. In this arrangement, the LBM operation, no matter who owns it, pays rent to the holding corporation. (Many LBM companies have this arrangement in place already.)
Steps to Prepare
If you are preparing to sell your business, before going on the market, work with your investment banker to get the land and buildings appraised. In most cases, the acquirer would prefer not to own the land or the buildings, but it would be prudent to split out the appraised value of your holdings categorically. Get appraisals for fair market sale value and fair market rent value. With these figures in mind, the corporation that owns the real estate can set the rent, no matter who pays it. Note that these rent and sale values are often subject to challenge at bargaining time in the acquisition process, so be fair and get substantive multiple opinions to arrive at a current “FMV” (fair market value).
How Rent Affects Value
Next, you have to consider how the rent affects the value of your company. Keep in mind that when you sell your business, the rent you have been paying has been charged against the business, so it was an operating expense and it is already “baked into” the EBITDA calculation. (The EBITDA is the figure to which a multiple is applied when determining the value of your business.)
It is important that you are currently charging a FMV rent to the business that can be validated through a FMV rent analysis, through a third party. Under a long-term lease arrangement with the new ownership, they will insist on a FMV rent. If you are charging the business now with higher than FMV rent, it will be adjusted to FMV rent and will be a negative adjustment to EBITDA. If you are charging the business below FMV rent, the new ownership may try to hold that rent and you will be renting to the new ownership under FMV rent. To take this issue off the table during negotiations, it is simply best to make sure you are charging FMV rent to the business.
In summary, as much as you would like to just sell the entire operation to a new owner—including the buildings and land—that rarely happens. Most acquirers will want a leaseback, rather than to park their capital in real estate where it is not actively generating a return.