The pros and cons of freehold ownership
Acquiring your own premises can be a good decision for your business, but there are nuances to think about when it is time to exit.
For business owners building value over the long term, acquiring freehold premises can be a sound strategic decision. Ownership provides stability, and removes exposure to rent increases and lease renegotiations. It also adds an asset to the balance sheet, with a value that is not tied to business performance. For many owner-managed firms, particularly in manufacturing, distribution, and industrial sectors, this approach makes considerable sense.
However, when planning an exit, property ownership introduces complexities that can influence deal structure, valuation, and buyer appetite. Understanding these issues early allows sellers to retain flexibility and maximise value when the time comes to transact
The valuation mismatch
Commercial property values increase over time, often significantly in areas with strong demand or development potential. Business owners who purchased premises years ago may find themselves operating from sites they would not have chosen to buy at today’s prices.
Some sellers hope or expect to see the full market value of the property reflected in the sale price. However, acquirors commonly value businesses based on future cash generating potential, not asset values. When a property is essential to operations and included in the transaction, its increased market value does not translate to better operating cash flows. As a result, buyers may not be willing to factor property value appreciation into their offer.
This can create an expectation gap between sellers and buyers that may require careful negotiation to reconcile.
Carving out the property
One solution is to separate the property from the trading business. The buyer acquires the operational company, while the seller retains the freehold and leases it back to the new owner. This allows the seller to benefit from a hypothetical future property disposal at full market value.
However, this structure introduces its own challenges. Buyers will typically adjust their valuation to reflect a market rent deduction from EBITDA. If the property has appreciated significantly, today’s market rate rent might materially reduce the adjusted EBITDA figure. Thus, the sellers may receive a lower amount for the trading business, but also stand to benefit from an attractive rental yield in the coming years.
Buyer preferences vary
Not all acquirors have the same appetite for property. Some trade buyers and corporate groups actively welcome freehold assets, often holding them in separate property vehicles post-acquisition. Others prefer asset-light structures and may insist on excluding property from the transaction.
Rigidly structuring a sale to include freehold property can therefore narrow the pool of potential buyers. Buyers who are otherwise interested in the business may withdraw or demand a carve-out, introducing the rent adjustment issues described above.
The optimal solution? Retain flexibility.
Because acquiror preferences vary, retaining flexibility becomes important for achieving a successful exit.
In this regard, a structure where the freehold property is held in a separate legal entity, with the trading company paying a market rent, has some advantages. It allows buyers who prefer not to hold property to acquire only the trading entity, whilst buyers with a preference for property ownership can separately negotiate the acquisition of the freehold.
But it is also true that keeping both the business and the building in a single entity (with no monthly rent hitting the P&L) works well for many trading businesses. And if this if how your business is currently organised, there is no urgent need to restructure it. Instead, you can retain flexibility by seeking advice in advance of your transaction, so that you understand your options and how they might impact the structure and value of the deal. For example, if an acquiror is enthusiastic about your business but unwilling to purchase the property, then understanding the details of how a carve-out of the building might work could help to keep negotiations progressing.
How we can help
At Rockworth, we work with business owners to navigate the complexities of company sales, including property considerations. Whether your freehold is held within the trading company or separately, we can help you evaluate the options, model the financial impact, and structure your exit to achieve the best possible outcome.
If you are considering a sale and have questions about how best to handle property ownership, we would be pleased to discuss your situation. Where necessary, we can also refer you to specialist tax and legal advisers who can support more detailed structuring work.
