Seller wants to lease RE

November 27, 2023

by a searcher from University of South Carolina - Darla Moore School of Business in Charleston, SC, USA

I'm looking at a 25 year old auto-body workshop and the seller owns the real estate and wants to sell business only and rent out the real estate into the future. In principle, this seems to make sense. With the rent adjustment factored in, it's selling for a fair price relative to earnings.

Maybe I'm being paranoid, but is there a risk that post-sale the seller somehow crashes the business (by hiring away key workers to a friend or bad-mouthing the company, etc.) and then re-establishes the company under a new name in the same location?

Obviously, there would be a non-compete, but it seems to me that a seller who takes the role of landlord post-sale has huge leverage over the company into the future.

Am I reasonable to be concerned about this?

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Reply by an intermediary
from California State University, San Bernardino in Stratton, CO 80836, USA

To touch on the seller's point of view. It is a common practice, but the seller is also at risk if the buyer fails to run the business adequately. It's not an easy thing to find new tenants in commercial real estate. My experience is that this is a good thing for the buyer. The seller will be inclined to offer advice to ensure the buyer succeeds. A great M&A attorney should be very useful in covering/advising the bases. From my experience as a past wealth manager, I've found it is tough for a business owner to switch from self-generating financial income to relying on a lump sum of funds/investments. Many business owners became owners because they wanted control over their financial income and not rely on a boss to decide their economic fate. So, leasing back the RE to the new buyer feels a lot more comfortable when making the transition because they believe in the company's ability to generate the funds. So, I think that should give a prospective buyer more confidence in the business if the new landlord is willing to bet on his company's future success. Ok, just another way to look at it. Best wishes forward.

Reply by an intermediary
from Arizona State University in Long Beach, CA, USA

You're overthinking it. It's totally normal for a Seller to sell the business and be the landlord. That's the classic retirement plan for many of my Seller clients. They want the Buyer to thrive. A successful Buyer will be a good long term tenant for them and they won't have to worry about not getting their rent on time (or at all). Of course, you should use your best judgement to ensure you're comfortable that the Seller is a reasonable person that isn't looking to play games, and have a non-compete in place. I'd be much less concerned if they are of retirement age.

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