CASE STUDY NO. 2: Don’t Assume the Buyer Will Lease Your Property
Selling Your Business While Keeping the Real Estate? Plan for What Happens If the Buyer Leaves.
For many business owners who own both their company and the commercial property it occupies, retaining the real estate after selling the business can appear to offer an attractive exit strategy.
Sell the operating company. Keep the building. Lease the property to the buyer. It sounds straightforward. But there is an important assumption hidden inside that strategy: What if the buyer wants the business—but does not want your real estate?
Unless the transaction is structured otherwise, the buyer may have the option to remain in the existing property or relocate the business after the acquisition. That distinction can materially affect a seller’s plans for the real estate after closing.
A 40-Year-Old Commercial Painting Company
My client owned a successful commercial painting company that had been operating for approximately 40 years. The business operated from a 6,800-square-foot commercial/light-industrial warehouse and office property, which was also owned by the seller. As part of the owner’s exit strategy, the intention was to sell the operating business while retaining ownership of the commercial real estate.
The preferred scenario was for the buyer to acquire the company and lease the existing facility from the seller.
This would allow the owner to separate two valuable assets: The business would transfer to a new owner and the seller would retain the real estate. However, there was an important consideration. The buyer had the option to lease the property from the seller—or relocate the business operation to another location of their choosing. That created a second possible outcome the seller needed to consider.
The Critical Assumption: Your Business Buyer May Not Become Your Tenant
Business owners sometimes assume that because a company has operated successfully from a particular property for decades, the buyer will naturally want to remain there. That is not guaranteed. The buyer is evaluating the business acquisition and the real estate decision from their own perspective. Even when the existing property has served the company well, the buyer may ultimately choose to operate elsewhere. If that happens, the seller may still accomplish the original goal of retaining ownership of the real estate—but without the business buyer occupying it.
The seller must then answer a very different question: Who will lease the property next? What Happens If the Buyer Relocates? If the buyer elects not to lease the existing premises after acquiring the business, the seller can still retain the property as intended. However, the owner may then need to source a replacement tenant unrelated to the business that was sold.
That possibility introduces several considerations that should be evaluated before the business sale is completed.
1. Vacancy Risk
If the business buyer does not occupy the property, there may be a period during which the building has no tenant.
For an owner planning to retain the property as an income-producing asset, vacancy can affect expected cash flow and the economics of the post-sale real estate strategy.
2. Leasing Downtime
A replacement tenant may not be secured immediately.
The property must now compete independently in the commercial leasing market.
The time required to secure another tenant can influence how successfully the seller transitions from business ownership into real estate ownership.
3. Tenant Improvement Costs
A new tenant unrelated to the former business may have different requirements for the property.
Depending on the prospective tenant and the negotiated lease terms, modifications or improvements may be required before the space can accommodate a new use. Those potential costs should be considered when evaluating the economics of retaining the building.
4. Market-Rent Uncertainty
The rent envisioned between the seller and the business buyer may not necessarily be the same rent achievable from an unrelated third-party tenant. Once separated from the operating business, the property must be evaluated on its own merits in the commercial real estate market.
That raises an important planning question:
What rent can this property realistically command if the business buyer does not stay?
Understanding that answer before the sale can help the owner evaluate whether retaining the real estate remains financially attractive under either outcome.
Evaluate the Business and the Real Estate Separately
One of the most important lessons from this scenario is that the operating business and the commercial property are related assets—but they should not automatically be treated as having the same future. A buyer may value the company without placing the same value on occupying its existing building. Before going to market, an owner who intends to retain the property should therefore evaluate two separate questions: What is the business worth to a qualified buyer? And: What is the real estate worth and how marketable is it without that business occupying it?
Answering both questions provides a clearer picture of the owner’s potential post-sale position.
Plan for Two Possible Outcomes
A seller considering this strategy should prepare for two realistic scenarios.
Plan A: The Buyer Acquires the Business and Leases the Property
This is often the preferred outcome.
The business continues operating from its established location, while the seller retains ownership of the real estate and enters into a lease arrangement with the new business owner.
Plan B: The Buyer Acquires the Business but Relocates
The seller still retains the real estate but must identify and secure a replacement tenant unrelated to the business.
This may introduce vacancy, leasing downtime, tenant improvement requirements, and uncertainty regarding achievable market rent.
Neither scenario automatically makes retaining the property a good or bad strategy. The important issue is whether the seller has evaluated both possibilities before relying on one outcome.
Questions Owners Should Ask Before Going to Market
If you own the property occupied by your business and intend to retain it after selling the company, consider these questions early:
- Is continued occupancy of the property essential to the business?
- Is the buyer expected or required to lease the property after closing?
- Could the business reasonably relocate?
- If the buyer relocates, how marketable is the building to an unrelated tenant?
- What is the current market rent for the property?
- How long might it take to secure a replacement tenant?
- Could a new tenant require improvements to the property?
- How would a period of vacancy affect the owner’s post-sale financial plans?
These questions should be considered as part of the exit strategy—not after the business has already been sold.
The Bigger Lesson: Don’t Build an Exit Strategy Around an Assumption
Selling an operating business while retaining its commercial real estate can be an effective strategy. But the success of that strategy should not depend entirely on the assumption that the buyer of the business will become the seller’s tenant. The business buyer may stay. The business buyer may leave.
A well-prepared owner should understand the financial and strategic implications of both outcomes.
“Retaining the real estate can be a great strategy—but don’t build your exit around the assumption that your buyer will become your tenant. Know what the property can do for you with or without the business in it.”
— Margot Murphy
For owners who have spent decades building both a company and valuable commercial real estate, the exit decision is rarely just about selling the business. It is also about deciding what role the real estate will play in the next chapter.
Before going to market, understand not only: “What happens if my buyer stays?”, but also: “What happens if they don’t?” Planning for both possibilities can help protect the owner’s real estate strategy, expected cash flow, and long-term financial objectives.
Your legacy deserves the right buyer—and a real estate strategy that works beyond the closing table.
