Do's and Don'ts of Real Estate in Your M&A Deal
Owning and controlling real estate is often viewed as favorable in a merger or acquisition, but how it’s handled can either make or break your deal. On the upside, owning real estate can provide the seller transaction benefits such as offering flexibility in how it’s treated, using it as an option to help finance part of the deal or transferring wealth if planned in a timely manner. However, real estate can also be viewed as a liability if it is not being properly managed. Common real estate pitfalls often seen in the transaction process include business owners signing a long-term lease with themselves or a third party (depending on terms), not following the real estate lease terms or using old terms, keeping unprofitable locations opened, holding a non-controlling interest in the company’s real estate and failing to have agreements reviewed by a real estate attorney, to name a few. These different circumstances can often put constraints on the deal and potentially drive down the value of the business. Here are some key real estate planning considerations to contemplate for your future M&A transaction.
Know your real estate value. One of the most important things to know is the value of your real estate and the market lease rates. Often times, sellers think they know and have a number in their head, but it may or may not be a realistic number. Consider conducting a real estate valuation to help you gain an understanding of your true real estate value every few years.
Keep it separate. Hold real estate on its own or in a separate entity, rather than in the operating business. This creates a significant amount of asset protection and increases your overall flexibility in a transaction. Also, separate real estate when evaluating the value of an offer even if the real estate isn’t held in a separate entity.
Use acceptable terms. Have a lease with acceptable terms, especially if the real estate is not sold in the transaction.
Disclose all ownership issues. Owning real estate sometimes creates some complexity in a transaction, especially if its ownership is not clearly defined. Be sure there is common ownership with the operating company unless there is an estate planning strategy in place, and that all transfers are fully documented (even within a family).
Maintain proper documentation. Have historical environmental studies, appraisals and other documents readily available. This can help resolve issues and avoid delays if the buyer requests this information.
Incorporate general lease or purchase considerations in your letter of intent (LOI). Business owners often want to punt on this issue in the LOI phase, but this is a crucial deal consideration that often gets left off the table to negotiate later. Remember, sellers have the most leverage before an LOI is signed.
Understand your lease terms and assignment provisions. If you lease property, be sure you understand your assignment provisions. By simply being informed, business owners can anticipate issues ahead of time and immediately resolve them, which can be critical in the deal process and timeline.As you enter into a transaction, there are other factors to consider such as getting the correct consent language in your lease agreement, ordering of environmental testing and surveys by the appropriate party early in the process, being aware of transfer taxes (depending on where your real estate is located), understanding the deal structure, having the appropriate representations and warranties around the real estate in place, and more. Most importantly, always have a qualified advisory team review your real estate documents before you enter into a written agreement with a buyer. Doeren Mayhew Capital Advisors works closely with business owners to help them prepare for sale, from evaluating the business and identifying value drivers, to positioning the company for a transaction and advising on the deal structure, and more. To learn more or to obtain assistance, contact us today.