Right from the beginning of the sale process, the question of whether to keep or sell the building deserves to be raised. Both scenarios can be explored. A good starting point for this reflection is to carry out an independent valuation to determine the "fair market value" sale price and the expected rent. The expert's qualifications and the reliability of the report are crucial, as it is a matter of convincing not only the buyer but also their banker. Some experts tend to flatter their client or provide a "going concern" value that holds no water when the building has to be sold on the open market. These overly optimistic appraisals end up complicating discussions rather than facilitating them.
When valuing the company, the amount of rent has a direct impact on profitability-based formulas. If the building is excluded from the transaction scope, the value of the business goodwill will be negatively impacted by an amount corresponding to the multiple used in the valuation formula. When profitability is low and the building's value is high, the earnings generated by the intrinsic business activity may not be sufficient to consider a sale. In this case, liquidation—implying the cessation of operations—might be the best option. Naturally, all consequences of liquidation will need to be studied: severance costs, liquidation surplus tax, etc. When these costs are substantial, selling, even at a bargain price, is preferable to liquidation.
In the case of a highly profitable company, on the other hand, the issue of real estate value will be less decisive.
One must keep in mind that the value of the building cannot simply be added to the profitability value. Since the operational real estate is necessary to generate the cash flow, its value is already included in the valuation obtained through this method. It is, however, relevant to compare the results obtained through profitability-based methods with the adjusted net asset value, which accounts for the adjusted value of the real estate.
So, should one own their operational real estate or not? Some multinationals or fast-growing startups prefer not to encumber themselves with real estate, keeping their focus on the business and maintaining the agility to adapt easily to change. In the SME world, however, business owners very often have a "brick in their belly"—a passion for property—and understandably so. Owning real estate means building wealth distinct from the core business, which comes in very handy in times of hardship. It is also a guarantee much appreciated by bankers. Moreover, in the event of an expansion or modification of the facilities, things are much simpler when you are the owner.
It should come as no surprise, then, that most buyers prefer to acquire the real estate rather than pay rent to the former owner. Provided, of course, they have the financial means to do so, as financing the real estate comes on top of acquiring the operations. A two-stage transaction, involving the immediate transfer of the business operations alongside the grant of a purchase option on the building, can sometimes facilitate financing. In such cases, precise agreements must be put in place to establish the terms of the lease and the purchase option. A put option can also be offered to the seller so they do not remain "stuck" with the property. The strike price can be fixed, indexed, or variable. To encourage the buyer, the rent paid can be deducted from the price, in whole or in part. Careful consideration must also be given to the rights and obligations of the parties during the lease term, for instance regarding capital improvements to the building.
How can the building be extracted when it is part of the same legal entity? Selling the property generally generates a heavy tax burden: tax on capital gains for the seller and registration duties for the buyer. A partial demerger can be considered, provided the transaction meets valid economic (non-tax) objectives. In certain cases, a sale-and-leaseback arrangement provides long-term financing with a repurchase option at maturity. Given the legal and tax implications, often involving substantial amounts, it is essential to consult specialists to implement this type of structure.
Article initially published in La Libre Économique by Tanguy della Faille, partner at Fondaris, on 7/02/2015. Published/updated version on the Fondaris website with the author's permission.
