The sale of a vehicle dealership involves two basic transactions wrapped into one, the sale of assets (goodwill, vehicles, parts, supplies and fixed assets) and the sale or lease of real estate. Here are 6 tips to better position your real estate for maximum value and a smooth closing:
- Leases: Leases are a large consideration of most transactions, regardless of whether or not you own the underlying real estate or lease your facility. While your business is marketable in either scenario, there are different factors to consider, and I’ll address each situation separately below.
Owners: Oftentimes we encounter dealers holding title to their real property in holding companies (and in some cases individually), and leasing the facility to their operating entities through an internal lease. These leases may have below-market rents, expired terms, and other unfavorable terms. This is fine when you are essentially your own landlord, but you should keep in mind that the value of your real estate is tied not only to recent comparable sales, but to the income that the land and improvements can generate. This internal lease can play a huge role in the valuation of your real estate, which is important if your purchase price is tied to a commercial appraisal in some way. Keep in mind that if you have a third-party tenant leasing space from you, like a collision repair facility or billboard company, you may want to reconsider the terms. Having strong internal and third-party leases can be quite helpful in capturing the value of your real estate, so it is a good time to review and consider renegotiating your property leases.
Tenants: If you are currently leasing space from a third-party, it’s worthwhile to carefully review your lease to consider such factors as assignability, years remaining in the term, renewal options, purchase options, rights of first refusal, and subordination clauses. All of these issues may come into play, especially if your buyer is financing the property; and it is wise to understand these rights so that they can be addressed early in the contractual stage.
- Title Work: The most common hurdle that we see in the sale of commercial property involves issues with title and/or survey defects. A simple title search may bring to light defects in the chain of title, like an improper transfer or lingering encumbrances. These situations can lead to long delays while the parties seek corrective deeds, orders from a probate court, or releases from an entity that is no longer in existence. It is best to discover these issues early before you go under contract, and it is well worth your money to obtain a simple title commitment prior to listing your property for sale. If it hasn’t been that long, pull out your title policy as it will be requested, and you may be entitled to a discount on title premiums.
- Tax considerations/prepayment penalties: Take a quick peek at your loan documents, especially if you haven’t owned the property for very long. There may be significant pre-payment penalties and tax consequences for selling within a short period. Furthermore, if you stand to make big gains, it is worthwhile to consider leasing your real estate or setting up a 1031 exchange. Speak to your tax advisor early to make sure you have a strong handle on your tax forecast.
- Appraisals: Obtaining a commercial appraisal, or at a minimum, a broker’s opinion of value, is well worth the expense. It will provide you with ammunition for negotiations, increase your confidence that you are receiving a proper value for your property, and give you a basis for allocation of the purchase proceeds when the time comes. Real estate values can vary wildly over the course of market cycles, and your property values may have changed recently. A good appraiser or broker will have a strong understanding of the market conditions and will consider all factors, including highest and best use, rental values, condition of improvements, size, excess land, and of course, location, location, location.
- Aesthetics/Inspection: Yes, this is real estate, so looks do matter. A little paint, landscaping, maintenance, restriping of the parking lot, and updates to your carpet or countertops can be well worth the expense. You might also consider having a company perform a simple property assessment and obtain a zoning letter to be sure that there are no latent issues. These updates will be reflected in that first offer, and curing any issues ahead of time will avoid those nasty renegotiations that can arise after your buyer receives a bad property assessment.
- Professional support: Far too often we find that parties have made the mistake of signing a form contract, or a one-sided contract that fails to address the necessary terms and timelines that ensure a smooth transaction. The benefits of a well negotiated and tightly drafted contract will far outweigh attorney’s fees, and you’ll have the assurance that the transaction is properly handled from the get go.
In summary, talk to your professionals and do your due diligence before diving into a contract.
These extra steps will pay huge dividends, maximizing your proceeds and avoiding unnecessary