5 reasons to split your property from your business
Entrepreneurs value the security of owning their own premises but there can be drawbacks, especially if you are selling the business. Gerard Lucas from Dow Schofield Watts’ corporate finance team explains when it might be best to separate the two.
For many entrepreneurs, there are few things more comforting than owning their own premises. Buying a building is more cost-effective than renting in the long-term, it provides a safety net in difficult times and an asset that will appreciate in value. The property can also be used as security to raise funds.
Yet private equity firms and large corporates often take the opposite view. They prefer to lease premises even if they have to pay a premium to do so, and any property they do own is generally held in a separate company.
So should smaller firms rethink their approach? As a general rule of thumb, holding the business property within the company suits many SMEs, although there are some drawbacks. If you are planning to sell your business, you should consider moving the property into a separate company structure.
Here are five issues you should be aware of if your business premises are owned by the company:
- It could simplify a sale of the business – private equity firms or large corporates usually prefer not to buy business premises. They look to invest in trading businesses and not have capital tied up in property. In this case, moving the property into a separate company in advance will simplify the deal process. It also keeps your options open – you can sell the business and the property at the same time if the right buyer comes along, or you could lease the property to the new owners of the business or sell it separately to maximise the value.
- It creates a ‘funding gap’ – even if a purchaser is willing to buy the property, they will only be able to raise 60 or 70% of its value via a commercial mortgage and will need a cash injection to make up the difference.
- It may push down the price – if the property accounts for too large a proportion of the business, you may not achieve its full market price. By contrast, if it is held separately you can enhance its value by putting a lease in place – especially if it is a long-term lease with a large corporate.
- It could limit the business’s options – the buyer may wish to reorganise the company’s operations and not be tied to a particular location. For any business, location can limit operational efficiency, whether due to restrictions on operating hours, increased transport costs or higher insurance premiums such as where a business is in a flood zone or it manufactures and recycles on the same site. Issues like these are not only important on a day-to-day basis but could also increase the level of warranties and indemnities required on exit.
- Your business and your property is at risk – even if you are not selling, putting the property in a separate structure will ringfence it in the unfortunate event that the trading company becomes insolvent.
This issue of property ownership reflects the different outlooks of SMEs, private equity and large corporates. For many entrepreneurs, separating the property from the business isn’t a priority. However, if they are looking to exit, they can often achieve a better overall return by retaining the property and agreeing a favourable long-term lease.
If you are preparing for a sale, consider extracting the property in advance – leaving it until the sale is in progress can lead to delays and additional costs. Of course, there are some cases where it may be best to keep the property and the business together – for example, if there are tax consequences, environmental issues or it is difficult to find suitable sites. It is always important to take professional advice on your circumstances.
If you are planning to sell your business or want advice on structuring your property ownership, our corporate finance and industrial property solutions teams can help. Email [email protected] to find out more.