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Selling a Company: Issues Around Property & Premises

Business Asset or Problem?

Buying An Asset Or A Problem?

The future use and ownership of business premises is always important when selling a private business. This article explores some of the most common issues that arise with both freehold and leasehold premises.

Business premises can be one of the most complicated and contentious areas when selling a company. The issues vary depending on the way the property is owned or paid for – owned freehold, leased or rented are the most common arrangements we come across.
 
What Are The Most Common Property Related Issues When Selling A Company?
 
Some issues are common to all types of property ownership arrangement. Is the property in good condition? Is the property really suitable for the type of business? Is the property in a good location? Does the buyer want to use the property going forward? These issues are usually fairly easy to resolve, although the resolution may be that there is no prospect of a deal. On the other hand issues arising from the ownership of the property, or the terms of the lease, tend to involve detailed and contentious negotiations as the sale proceeds.
 
Issues Concerning Freehold Properties When Selling A Business
 
When a broker values a business the trading assets and the real estate are two separate sources of value. The first question for the broker is always “How determined is the client to sell the property along with the business”? If the client is prepared to be flexible the number of potential buyers will be increased. By flexible we mean is the client prepared to consider a sale of the premises along with the business, or leasing the premises to the buyer of the business, or finding a new tenant or third party buyer?

We regularly come across situations where freehold premises have become too valuable to be supported by the cash flow of the business. This often happens when the company has declined or remained steady over a number of years, but the value of the property has continued to increase. The buyer of the company can be faced with a situation where most of the cash flow of the business will be swallowed up by mortgage payments if he buys the premises along with the business. In these circumstances the seller’s hand is forced, the property sale has to be separated from the sale of the business.
 
Issue Concerning Leasehold and Rented Properties When Selling A Business
 
Leases create a different set of problems. These often revolve around the number of years left on the lease. If the company is a retailer, dependent on a high street location for trade, a buyer will want a long period left on the lease. If the company is a manufacturer or distributor, a buyer may well prefer a short time left on the lease. Especially if there are savings to be made by consolidating with another business.

Most leases require the tenant to hand back the property in its original condition at the end of the lease. It is not unusual for a landlord to levy a hefty charge, often tens of thousands of pounds, at the end of a lease for repairs and restoration. Company buyers know this and will try to deduct a sum to cover these costs from the purchase price of the business.

In most cases a landlord will have to consent for a lease to be transferred to a new owner of a company. If the seller has provided personal guarantees for the payments under the lease the landlord may be unwilling to consent to a transfer unless the new tenant provides the same guarantees. We have seen stand offs on this issue sink a number of company sales over the years.

In the current economy more properties are rented on short term contracts. Sometimes on a month to month basis, but more often on a 6 or 12 month license. Although the rent will typically be a little higher, the additional flexibility may be worth the extra cost, particularly for a seller contemplating a sale within 2-3 years.

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

 
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