Not every business sale necessarily includes real estate. It is perfectly possible to sell a business as a going concern (fonds de commerce) or an operating company without real estate. In such cases, the buyer must naturally pay attention to the lease agreement, which can have a significant impact on the business's sustainability or financial position.
Here are a few recommendations to avoid potential stumbling blocks when one or more properties are part of the target company.
First and foremost, a transaction must be well prepared. Trying to sell a company holding non-operational assets is a bad idea. Indeed, it will be very difficult to find a buyer willing to pay a good price for assets they do not necessarily need, as they will prefer to preserve their financial capacity for operational growth. Thus, non-operational assets like a seaside apartment or a residential home must be carved out when held within the operating company.
In the same spirit, the real estate must be fully ready for transfer. This may seem obvious, but it frequently happens that the separation between private and business premises has not yet been completed, or that utilities/meters are not separated. If the necessary work has not yet been carried out, it should at least be planned and budgeted.
When the real estate involves split ownership (démembrement: usufruct, emphyteutic lease, or building rights) or was financed via real estate leasing, it will be necessary to examine in advance which structure is most appropriate for both seller and buyer.
Soil contamination must be addressed in all cases at the time of sale. Remediation costs are often very substantial, and the buyer will not want to take on that risk. This item is generally part of the acquisition due diligence. Even if undetected at that stage, it risks resurfacing later and becoming a subject of litigation as a latent defect or under representation and warranty claims (garanties d’actif et de passif).
The valuation of the property must be as objective as possible. Real estate appraisal by an independent expert—preferably bank-accredited—will be very useful. There is no point in trying to inflate the property price, as this risks scaring off prospective buyers.
The tax implications must also be taken into account. When the property is held inside a company whose shares are sold, no registration duties or capital gains tax will apply. However, the buyer will not be able to depreciate the property investment moving forward. It is therefore logical for real estate held within a corporate structure to undergo a discount. The amount of this discount can be negotiated between the parties (up to the amount of the deferred capital gains tax liability).
The main pitfall in corporate real estate is undoubtedly the question of financing. The financing duration for corporate acquisitions is significantly shorter (often 5 to 7 years) than for traditional real estate (15 to 20 years). When the objective value of the property is high but the operating business's profitability is low, it becomes impossible for the buyer to structure their financing unless they bring in substantial equity. Creative solutions must then be found to satisfy all parties. In some cases, a debt push-down can be implemented (replacing loan debt in the acquisition holding company with credit in the target company) to spread out financing over a longer duration. Another alternative is to sell the operating assets first while retaining the real estate, which is then leased to the buyer, potentially with an option to purchase. This solution enables the buyer to finance the acquisition more easily across two phases. However, the tax cost for the seller will be higher, as it constitutes an asset sale.
Corporate real estate is often a major issue during business exit negotiations. Representing a property of considerable asset value, financing it is not always easy. It is therefore important to reflect jointly on the best legal and financial structure to set up a smart and balanced transaction.
Article originally published in La Libre Entreprise by Tanguy della Faille, Partner at Fondaris, on 22/01/2011. Updated/published version on the Fondaris website with the author's permission.
