Q&A: Selling vs. Leasing a Business

What’s the best way to sell my business — or is it better to lease it? If I decide to lease, what’s another way of coming up with a leasing price other than by square footage?

There are a number of ways business owners can cash out of their beloved businesses. They can sell the operating company outright to family members, new investors or competitors. Licensing a company’s technologies, patents and brands for other companies to apply to different industries is another way business owners can generate extra cash from their company’s assets. And, of course, owners of successful consumer-oriented businesses can sell their business concepts to franchise developers for regional or nationwide expansion.

Owners of real estate (office, warehouse, manufacturing or retail space) and an operating business have additional options. They can sell both the business and the real estate to a new owner, or they can sell just the real estate or just the business. These options are only viable if the new owner strongly believes in the future profit potential of the business or building. If prospective owners don’t see any practical path to profits, they won’t buy at any price.

In order to weigh strategic sale options, first you must evaluate the business and the real estate as separate assets. Here are questions to ask about the value of your business: Is the business generating positive cash flow on a consistent basis? Is cash flow slowing or growing? Is there any other business that could generate more revenues or profits from your company than you could? Is the business dependent on your customer relationships, name or operating know-how? Would the company’s customer base go away if the business moved to another location?

Multi-use commercial real estate is often easier to evaluate than operating businesses. Owners can ask real estate brokers for input on the current commercial real estate climate. Ideally, the market value should be less than all outstanding debt on the property. But the timing of real estate sales can also be influenced by tax issues related to property gains or losses — a commercial real estate broker can advise on this as well.

It’s possible that a property owner can earn more by closing or moving an operating business and allowing an entirely different type of business to lease space in an attractive building. Building owners may also be able to structure income based on a percentage-of-sales model as a complement to traditional price-per-square-foot lease terms.

In my experience, savvy small-business buyers rarely want to own real estate, and real estate professionals rarely want to own operating businesses. The strategies and funding required to increase the value of each are vastly different.

So, owners who want to maximize the value of an operating business or property should be open-minded.  The best deal may be the most creative one.  Brainstorm ideas with as many business and real estate professionals as you can.