Selling a Business and the Building It's In

If you own the building your business runs from, you have a choice most sellers don't: sell the property with the business, or keep it and become the buyer's landlord. Neither is always right. The calm way through is to treat the business and the building as two assets, price each one, and pick the structure that suits you and your likely buyers.

Three common ways to do it

• Sell both together. One buyer takes the business and the property. You leave with the full proceeds and no ongoing tie. The price is higher, so fewer buyers can afford it, but lenders often like the security of the property.
• Sell the business, lease the building. You keep the property and sign a commercial lease with the buyer. The business costs less, so more buyers can afford it, and you keep rental income. You also stay a landlord, with the work and risk that brings.
• Lease now, sell the building later. Some sellers lease with an option or right of first refusal, so the buyer can buy the property after a few years once the business is proven to them and their lender.

Price the business and the building separately

Buyers value a business on what it earns. Our guide to what your business is worth covers the basics. The building is valued like any commercial property, by a commercial appraiser or a realtor's opinion of value. Keeping the two numbers separate helps you:

• Explain the business price to buyers without the property muddying it.
• Show a lender what it is financing.
• Split the purchase price for tax, since land, building and business assets are treated differently.

Fix the rent before you sell

If you own the building, your business may pay you no rent, or rent that isn't market rate. A buyer will have to pay real rent, so your financial statements need to show it. Add a fair market rent to the costs when you work out profit, even if you plan to sell the building too, because buyers and lenders compare businesses on that basis. Our guide to add-backs explains how adjustments like this are shown.

If you keep the building and lease it

You'll be the buyer's landlord for years, so treat the lease as seriously as the sale itself:

1. Agree a fair market rent and how it rises over time.
2. Set a term long enough for the buyer and their lender, often five years with renewal options.
3. Be clear on who pays property tax, insurance, repairs and maintenance.
4. Ask for a security deposit and, if the buyer is a company, a personal guarantee.
5. Decide whether the buyer gets an option to purchase or a right of first refusal on the property.
6. Think about what happens if the business struggles, because your rent depends on it.

Our guide to the commercial lease when selling covers the tenant's side, which is what your buyer will be reading.

If you sell both together

• Use one agreement or two linked ones. Many sales use a purchase agreement for the business and a separate agreement for the property, closing on the same day. See the purchase agreement.
• Expect property due diligence. Buyers and lenders may ask for an appraisal, building inspection, title search, survey and sometimes an environmental report, especially for older or industrial sites.
• Deal with the mortgage. Most mortgages must be paid out at closing. Our guide to selling a business that has debt covers payouts and discharges.
• Check zoning and permits. Make sure the buyer can keep using the property the way you do.

If the building is in a separate company

Many owners hold the property in a holding company and the business in an operating company. That can give you more choices, such as selling the operating company's shares while keeping the holding company and its building. It can also change the tax result. Our guide to asset sale vs share sale explains the basics, and your accountant can tell you what fits your setup.

Tax points to raise with your accountant

• Capital gains on the land and building, and possible recapture of depreciation (capital cost allowance) claimed on the building.
• Whether GST/HST applies to the sale of the commercial property. See GST and PST when selling a business.
• How the price is split between land, building, equipment and goodwill.
• How rental income will be taxed if you keep the building.

Our guide to taxes when selling a business has more.

A practical checklist

1. Decide whether you'd rather leave with cash or keep rental income.
2. Get a separate value for the building.
3. Show a fair market rent in the business's numbers.
4. Gather property documents: title, survey, tax bills, insurance, inspection and repair records.
5. Ask your accountant how each structure affects your tax.
6. If you're keeping the building, draft the lease terms before you list.
7. If you're selling both, plan the mortgage payout and property due diligence.
8. Have a lawyer prepare the agreements and the lease.

A note on advice

This guide is general information, not legal, tax, real estate or accounting advice. Property, tax and leasing rules differ by province and situation. Please have a lawyer, an accountant and, for the property, a qualified appraiser or realtor help you before you sign.

See also: documents needed to sell a business and due diligence when selling.