Preparing to transition your real estate company
Clark County is home to numerous businesses in the real estate and development industry. Many owners are taking advantage of slow economic times to prepare for what will inevitably come – a transition of the ownership of their businesses to family members or outside buyers.
There are important steps owners can take now to help maximize value in a transition.
Identifying and Capturing Value
Often the value in a business represents an owner's lifetime of work. It is important that the owner capture as much value as possible in a business transition to fund his or her retirement or other plans. Valuation of a business in the real estate industry is often based on its real property assets or a combination of the value of income flow and fixed assets.
If rental income is an important part of your business, having a long-term lease secured for each parcel will be critical from the buyer's perspective. For service-oriented firms such as real estate broker companies, intangible assets like client loyalty may comprise a significant part of the value. In most instances, an appraisal or other documentation to support the valuation will be necessary.
Owners should be prepared to face the reality that their businesses could be worth less on the open market than they might have hoped given the current economic conditions. These conditions might make a transfer to family members or even employees the most attractive transition option.
Succession Planning
A crucial step for any business is to develop a succession plan that enables the owner to meet personal objectives and ensure the business's growth following a transition. As the owner, you should evaluate how the business is doing financially and identify what you want to get out of the business. A succession plan should also provide steps for navigating the family dynamics that are sure to arise in a transition. Therefore, it is often advisable to prepare a succession plan in conjunction with your estate planning process.
Succession plans can also be critical to a business's daily operations. For example, bonding companies often require construction companies to have a succession plan before issuing a bond. Additionally, if a company employs licensed agents or brokers, a succession plan should provide for representatives to possess the requisite licenses during and after a transition to ensure continuity in business operations.
Taking the Next Steps
Start evaluating your business's readiness for a transition now by identifying and correcting issues that a potential buyer is likely to raise. For example, it is usually best to hold real property in a limited liability company (LLC) rather than a corporation. Placing each property in a separate LLC reduces the owner's risk of liability and allows property to be more easily transferred. Additionally, strategic gifting objectives can be more easily met if real estate is held in an LLC separate from an operating company.
A buyer is certain to scrutinize all financial records, organizational documents and liabilities associated with your business. Each business entity should have a file with executed copies of all corporate documents, including an LLC operating agreement or bylaws and stock certificates properly issued to the owners. Minutes for each entity should reflect that significant decisions such as the purchase, sale or mortgage of real property have been approved. Moreover, documentation showing that your business has a good title to the real property should be in place. If there are unresolved disputes, especially involving environmental liabilities, these should be resolved or disclosed in the transfer documents.
While there are many considerations associated with transition planning, starting early and assembling a team of professional advisors familiar with your business will make the process manageable and worthwhile.
Matt Bisturis is an attorney in the Vancouver office of regional law firm Schwabe, Williamson & Wyatt. He practices in the area of business and real estate transactions and is a member of the firm's Business Transitions Group. Matt can be reached at mbisturis@schwabe.com or 360-905-1113.
