Selling Your Business? Decide What Happens to the Building

An owner who has run a company from the same building for twenty or thirty years tends to think of the two as one asset. When it is time to retire, sell or close, they come apart. A business buyer pays for earnings and customers. A building buyer pays for rent, or for a place to run a business of their own, and usually brings a different lender.

The building decision is easier to make before a business buyer is at the table than after. It changes what each sale brings and whether you keep an income once the company is gone.

Sell the building with the business

This is the simplest closing, with one buyer and one date. It fits when the buyer is an operator who wants to own the real estate and the business earns enough to carry the debt on both. Buyers using SBA 7(a) loans, which go up to $5 million, can often finance the business and the building together, and the lender will usually order an appraisal of the building.

If the business is sold as assets, the price has to be divided among the building, the equipment and the business itself, and buyer and seller generally both report that division to the IRS. It matters because each piece is taxed differently. Put a number on the building first, from recorded sales of similar buildings nearby, so the division starts from a real figure. The commercial property lookup lists recorded sales by town and size.

Keep the building and lease it to the buyer

Plenty of business buyers do not want to own real estate, or cannot finance it on top of the company. You can sell them the business and stay on as their landlord. You keep an income and the building's appreciation, and you can sell the building later as a leased investment, which can be worth more or less than the same building empty. Selling vacant or leased explains why.

Your rent now depends on a business you no longer run, so the lease carries the risk. Set a market rent. A rent that is too high weakens the company you just sold, and one that is too low is a discount you hand the building's next owner. Settle the term, the renewal options and a personal guarantee before the business contract is signed, because the buyer's lender will read the lease.

Sell the building and lease it back

A sale-leaseback turns the building into cash while the business keeps operating in it. You sell to an investor and sign a lease as the tenant. Owners use it to take the equity out before selling the company, and it can make the company easier to sell, because a buyer then has to finance only the business.

The investor's price rests on the lease you sign. A sustainable rent and a longer lease with a creditworthy tenant can support a higher price, but they also commit the business to costs for years, which a later buyer of the company will price in. The building sale is taxed like any other, including tax on the depreciation you took over the years; Nine Things Sellers Get Wrong explains that part.

Lease now, sell later

Some properties are more than a buyer will take on in one step. A lease lets that buyer move in first and buy once the location has proven itself.

How the Long Grove deal came together.

Write the lease with the sale in mind. Decide now whether the tenant gets a purchase option or a right of first refusal, at what price or by what method, and for how long. Either gives the tenant a reason to invest in the site, and it also limits what you can do with another buyer later.

Close the business and sell the building empty

When the business will not continue, the building sells on its own, usually to an owner-user, meaning a company that wants it for its own operation. An owner-user can pay more than an investor for the same building, because it is paying for the use of it rather than for rent.

The Peterson Rd story.

An empty building still carries taxes and insurance every month, so line up the sale before the business closes if you can. Check that the likely next uses are allowed where the building sits; the commercial zoning lookup shows what each district allows in the towns it covers.

Before you talk to a business buyer

Know what the building is worth two ways: empty, to an owner-user, and leased, to an investor. The value estimator gives a range for your building.

Decide whether you want an income or a clean exit. That choice rules some of the five paths in and others out.

If a lease is part of the plan, settle rent, term and guarantee before the business contract, not after.

Talk to your CPA about the tax. A 1031 exchange can defer the tax on the building, but only the building: since 2018 an exchange covers real estate only, so equipment and the business itself do not qualify. Both the building and the replacement have to be held for business or investment use, and the same taxpayer, for federal income tax purposes, has to sell one and buy the other, which matters if the company holding title is closing. In practice the exchange is set up through a qualified intermediary before the building's sale closes. The 1031 calculator counts 45 and 180 days from a closing date.

Ask your attorney about Illinois' bulk-sales notice. When a business sells most of its inventory, fixtures, equipment or real estate outside its normal course of business, and a building sold on its own counts, the buyer has to notify the Illinois Department of Revenue at least 10 business days before closing. A buyer who skips it can be liable for the seller's unpaid Illinois taxes, up to the value of what it bought, and the Department can order part of the price held back. Cook County has a separate notice, due 45 days before closing, for businesses subject to County taxes. Some villages also require an inspection or a certificate before a commercial building can change hands; the six-month guide lists several of them.

Common questions

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