Can an Operating Business and Commercial Real Estate Be Sold Together?

Selling a working business requires a very different approach to valuation, especially when the real estate is included. Sometimes even business real estate agents and brokers don't realize the differences because they don't get that many requests for this type of transaction mix.

A business owner who owns the property will want to either close down the business and sell its real estate or sell both at the end of the day. Agents and brokers are often tempted to list both together, but that can be a mistake without a full understanding of all the intricacies involved.

Selling the Business

Very different contractual agreements are necessary to transfer business assets. They aren't like real property because they can contain guarantees of volume and existing client/customer base demographics. These can't be addressed in a standard commercial real estate purchase document.

The valuation parameters are different as well. A working business will have "good will" considerations, in addition to existing contractual and possibly supplier agreements. These can't always pass to a new owner. Good will is somewhat intangible, and agreements might include clauses that prohibit transfer.

This isn't to say that the value of any real estate can't be included in the sales price of a business enterprise, but it should be delineated.

Profit and Loss vs. Cash Flow

Real estate professionals, particularly those in the commercial niche, have the knowledge and expertise to analyze rental income and expenses, presenting them to clients for decision-making purposes. But they can fall short when they're analyzing another type of business from a financial perspective.

There's a lot under the surface, and examination of a profit and loss (P&L) and balance sheet doesn't begin to get at the true facts.

The P&L of a business is often very different from its cash flow. Any good business broker will require a cash flow analysis as one of the most important financial documents. Adjustments to the value of the business are made based on items in the cash flow, including:

• Detailed spreadsheets of all income
• Detailed listings of all expenses
• What expenses are actually going to the benefit of the owner
• An adjustment back to income for those owner-benefit expenses that will go away—they won't necessarily be expenses to the new owner as well
• An addition to expenses for owner-benefit costs that will require the new buyer to increase expenses, such as that owner managed the business and buyer will have to hire a manager

Buyers should adjust their valuations of a business downward if the selling owner also managed the business due to the necessity of hiring a manager at market salary. They should likewise adjust for any other costs the previous owner didn't have to spend on but that the transition will require.