A wise person once postulated a merger is like a marriage, an acquisition is like the arrival of a new baby and a disposition is like a divorce, of sorts.
In all of these instances, a new way of doing business emerges and some excess occurs. If you doubt, for a moment, what I am saying about excess, consider commercial real estate. When a merger with another company, division or operating unit is affected, there generally is a surplus of the physical plants from which business operations are conducted.
If you acquire a competitor, their customers, billing, shipment schedules, culture, and facilities must be morphed into your existing company. A sale of your business can result in the assignment of an existing commercial real estate lease or the origination of a new lease in the case of an owner-occupied building.
Below are some specific examples (and suggestions) of the role commercial real estate can play in a merger, acquisition, or disposition of a business.
Disposition of a business with long- or short-term leased commercial real estate:
If a long-term lease (longer than two years) is in place, chances are the buyer considered the location and the remaining term of the lease. If the buyer opts to occupy the location, an assignment of the lease obligation generally is requested.
If the buyer does not intend to occupy the location, you as the occupant must deal with a lease that must be satisfied – without the benefit of a business to generate income. Some owners are happy to work with an occupant that is paying a rate substantially below market.
If a short-term lease (two years or fewer) is in place, this can be tricky if the owner believes the occupant (you or the business you are buying) has such an investment (distributed power, AQMD permits, ISO 9002 permits, paint spray booths, offices, freezer/cooler space, conveyor systems, etc.) in the location that moving them would be too costly.
The owner may attempt to negotiate a higher-than-market rate, assuming a move would be too costly. It’s important to determine the buyer’s desire to stay in the location and attempt to negotiate an extension. Otherwise, your buyer may negotiate a lower price for your business, based on the uncertainty of the occupancy.
Merger of two entities:
We saw a great deal of this activity in the latter part of the last decade through bank consolidation. Remember when one bank merged with or was acquired by another and you would find a Wells Fargo branch next to a Wachovia branch in the same retail center (now common ownership)? A bunch of excess real estate was created and had to be purged from the market.
Acquisition in another market:
I have a client who acquired a company in Arizona with three locations. The decision was made to keep all three locations, but there was much work to do in renewing leases, upgrading the sites, and assigning the leases to the new entity.
Strategic or private equity acquisition of the business and real estate:
On two recent occasions, I have encountered a company that was sold – one to a strategic buyer and one company sold to a private equity group.
In both cases the real estate was acquired along with the operating companies. In neither case was the strategic buyer or the private equity group in the business of owning commercial real estate.
Also, in both cases, moving the operating company into another location would have been costly, disruptive, and inefficient. So what was the solution?
In both cases, the new business owners (the strategic buyer and private equity buyer) sold the commercial real estate to a commercial real estate investor, along with a lease back of the real estate. The operating companies stayed put, the new owners disposed of an asset (the unwanted commercial real estate) and defrayed the cost of the acquisitions.
Courtesy of: Orange County Register
