equity & exitsBlog · Business + Real Estate Exits
Own Your Building? Why Selling It Bundled With Your Business Can Shortchange Your Exit
If you own the real estate your business operates out of, you're sitting on a gold mine. You're also standing in a minefield.
Most owners figure the easiest exit is to sell the building and the business together as one package. One buyer, one escrow, one closing date. Easy, right?
The trouble is that simplicity can be expensive. You're forcing two completely different kinds of assets into one math equation, and the buyer usually gets to pick which math wins. Let's break it down.
Two assets, two completely different math systems
Your business is valued on a multiple of its earnings, usually SDE (seller's discretionary earnings) or EBITDA. In plain terms, that's a multiple of your profit, adjusted for risk.
Your building is valued on market rent and a cap rate: the annual net rent a property produces, divided by its price. Investors buy a stable, appreciating building with a solid tenant on very different terms than they buy an operating business.
When you bundle the two, the buyer (often a sophisticated investor) tends to apply the business lens to the whole deal. They'll try to get the real estate at a discount because they're taking on the risk of the business. You end up handing over a stable, appreciating property at a markdown just to get the business sold.
In a market like La Verne, the Inland Empire, or the San Gabriel Valley, real estate is far too valuable to be treated as a tacked-on extra.
The fix: set up a self lease-back before you go to market
The solution is to structure the deal before it ever hits the market, with what I call a self lease-back:
- Separate the roles. Your business is the tenant. Your real estate entity is the landlord.
- Sign a formal, market-rate lease between the two. Think written terms, real rent, and a meaningful term (the buyer pool for the building wants to see something like a 10-year lease).
- Let the building stand on its own. With a documented lease in place, the building now has a value as a standalone investment property.
One buyer becomes two kinds of capital
Now when you go to market, you have two products instead of one:
- The business goes to an operator who wants the cash flow.
- The building goes to a real estate investor who wants that 10-year lease you just signed.
You've turned one buyer into competition between two different types of capital. In the right deal, I've seen this kind of structuring add $200,000 to $500,000 to an owner's walk-away check. Your number depends on your rent, the cap rates in your market, your lease terms, and how much buyer demand there is for each piece.
Here's a quick illustration (not a quote, just how the math works)
Say a market-rate lease pays $120,000 a year in net rent. If investors in your area buy similar properties at a 6.5% cap rate, the building is worth roughly $120,000 ÷ 0.065 ≈ $1.85 million as a standalone investment. Change the rent or the cap rate and that value moves, which is exactly why the lease has to be real and defensible.
The catch: the rent has to be market
This is where owners get tempted, so let's be clear about the trade-off:
- Rent set too high inflates the building's value on paper, but it lowers the business's earnings, and with them the business's value and the buyer's ability to finance it. Lenders and investors will check your rent against the market.
- Rent set too low props up the business's earnings but undersells the building.
Market rent is the number both buyers will believe. That's the whole point.
Before you sign a listing agreement
If you own your building and you're thinking about an exit in the next 24 months, look at your lease-back potential before you sign a listing agreement. It takes time to put the right lease in place, get the entity structure right, and talk through the tax side with your CPA. Selling a business and selling real estate can be taxed very differently, and the building may open the door to options like a 1031 exchange.
Frequently asked questions
Should I sell my business and my building together or separately? It depends on your numbers, but bundling often lets a buyer value the real estate through the lens of business risk. Separating them with a market-rate lease lets each asset be valued by the buyers who pay the most for it.
What is a self lease-back? It's a formal lease between your operating business (the tenant) and your real estate entity (the landlord), set at market rent. It turns the building into a standalone investment with a documented income stream.
How long should the lease be before I sell? Long enough to give a real estate investor confidence in the income. Terms around 10 years are common in this strategy. Work out the details with your attorney and broker.
Can I just set a high rent to make my building worth more? Not without consequences. Higher rent lowers the business's earnings and value, and buyers and lenders compare it to market. Market rent is the defensible number.
See what your building and business are worth apart
Request your free Forensic Exit Audit, and let's make sure you aren't leaving your building's value on the table.
The figures in this article are illustrative, not an appraisal or valuation. Results vary with rent, cap rates, lease terms, financing, and buyer demand. This article is for education only and isn't legal, tax, or financial advice. Talk with your CPA and attorney before restructuring or selling.
Sumathi Sivakumar | Equity & Exits | DRE #02159366