Selling out and shutting down

May 30, 2008: 10:29 AM ET

Should a buyer pay more for a building if selling it would mark the end of the owner's business?

Michael, Salem, Ore.
Dear FSB: My parents have a small business and own the building in which it operates. The person next door would like to expand by buying my parents' building, and keeps asking them for a price at which they would sell. My Dad would like to retire if they sold it, and would lose the income from the business. Two questions: Should the person pay a premium because he needs the building to expand? (Supply and demand, right?) And second, should the value of the business itself be added to the asking price, since he would be putting my Dad out of business?
By Katie Ryan O'Connor, Fortune Small Business contributor
Dear Michael: You are right in assuming supply and demand are at work here, but perhaps not exactly in the way you think.

"Of course, you can set the market value of the property at any price you want, for any reason you want," says Brad Meyer, president and CEO of Dallas-based Trinity Real Estate Solutions, a nationwide real-estate inspection firm. "But prospective buyers will be evaluating it from various perspectives too: location, ease of access, expansion room, signage exposure, age, maintenance, income potential, area property sales, size of lot, potential hazards (flood, fire, etc.), to name a few."

The factors that might mean a lot to you - such as making sure your Dad has a well-funded retirement - aren't going to hold a lot of sway with buyers. So be sure to separate your emotions from the market.

"Many sellers have a strong emotional attachment to their property. They believe it is worth more than market value," Meyer says.

That point is echoed by Gary Grudnitski, a professor of accountancy at San Diego State University with real-estate valuation experience.

A potential buyer isn't going to respond to the fact Dad is retiring in the same way you would, for obvious reasons. "After all," Grudnitski says, "[Dad] is not precluded from working elsewhere" just because he sells the business.

Your best bargaining chip seems to be with the expansion possibilities the property offers the buyer next door.

"Typically when you are talking about a commercial property, you are talking about what that property will return based on its usage," says Grudnitski. "If it means they will just have to knock down walls rather than move their whole business premises, I would bargain hard for that. From the buyer's standpoint, this is much different from moving somewhere brand new."

Meyer recommends you seek a qualified property appraiser or commercial broker. They can conduct a "broker opinion of value" (a detailed assessment of a property's market value, given the economic characteristics of the property and the prevailing trends in the marketplace) and provide an objective opinion on the property.

The Appraisal Institute offers links to expert local appraisers on its website, says Leslie Sellers, vice president of the Chicago-based organization, who recommends you also seek an "investment value" analysis of the property which, more than market value, will take into account some of the relevant intangibles, such as the benefits to the adjoining owner.

Give us your advice: Check out recent "Ask & Answer" questions.

Related links:

What's your business worth - really?

How to value the worth of your business

Mistakes to avoid in selling your business

Sell your business for the highest price

Finding the best broker for your business


Join the Conversation
Search This Column
View all entries from this: Week, Month
Powered by VIP.