Often successful business owners invest in real estate because it can be a tax efficient way to handle the retained earnings of a business. And when it comes to exit planning, business owners with real estate have more exit options. This is a good thing.
For instance, while a business owner occupying rented space has a business to sell, he or she must hope a landlord won’t become a barrier to lease assignment. Conversely, a business owner who owns the real estate has the option of becoming a landlord by concluding a sale with a leaseback arrangement, or selling the business and the real estate as a package or separately.
But with opportunity comes complexity, as a business transaction becomes a business and a real estate transaction when the real estate is included. This requires a business owner to understand the differences between a business broker vs real estate broker. Both may be part of the transaction. Let’s explore…
1) Real Estate Brokers and Business Brokers have different requirements for licensure
In my state of North Carolina and in many others, the sale of real estate is overseen by governmental associations such as the North Carolina Real Estate Commission which grants people and businesses a license to sell real estate. To be a provisionally licensed NC Real Estate broker, one must take and pass a 75-hour North Carolina Broker Pre Licensing Course, and then complete post licensing and continuing education classes to remove the provisional status and maintain the license.
But what license does one need to be a business broker? In the state of North Carolina and about 33 others, a person does not need a real estate license to sell a business. You can see a list of the 17 states that do link real estate licenses to business brokerage on the Business Brokerage Press blog.
What this means is that anyone can be a business broker in those states which don’t require a real estate license. And it means that real estate brokers can get involved in business brokerage deals in just about any state, and that business brokers can’t do the opposite.
2) Business brokers and real estate brokers subscribe to different associations.
The National Association of Realtors ® (NAR) awards the title of “Realtor ®” to real estate professionals who maintain memberships, and oversees regional groups of Realtors ®. Alternatively, the International Business Brokers Association (IBBA) functions in this role for business brokers and has regional associations such as the Carolinas & Virginia Business Brokerage Association (CVBBA) which enable brokers to network and attend educational events in close proximity to their respective markets.
To distinguish licensure and associations, a person practicing a career in real estate or business brokerage must abide by the licensing requirements of his or her state, follow applicable statutes, and collect commissions legally, but joining their respective associations is voluntary and shows a commitment to their field’s “code of ethics.” That being said, the NAR is so strong that virtually all of the recognized names in real estate won’t partner with real estate professionals who are not members of the NAR and their regional associations.
3) Business brokers and real estate brokers can achieve different designations
In addition to licensure and associations, a third level of credibility can be added to a career in Real Estate Brokerage or Business Brokerage. The achievement of specialty designations shows the highest level of commitment to the respective practice, as they require significant time and financial investment. The NAR offers more than two dozen specialty designations/certifications such as the Certified Commercial Investment Member (CCIM). The IBBA offers just one: the Certified Business Intermediary (CBI) designation.
4) Business brokers and real estate brokers use different contracts
In general, real estate brokerage is more regulated and streamlined than business brokerage. While by definition every piece of property is different, in my state of NC, the NAR and the NC Bar association have agreed on standard forms for transferring property and conveying leaseholds. Real estate transactions can be formalized more easily than business transactions because real estate records are more easily verified through public records such as deeds which are filed with government agencies.
When dealing with privately held businesses, there is more risk and the buyer must verify that what he or she is buying is transferable and that it makes the money the seller proclaims. The sale of a piece of real estate doesn’t involve employees, representations of earnings, goodwill, and similar nebulous items.
The need for “covenants and representations” is greater in business transactions than real estate transactions.
For this reason, it’s common for business brokers to work with advisors through customized documents such as a “letter of intent” that leads into a “definitive purchase agreement.” This staged progression of paperwork enables a buyer to show some limited commitment, do some research, and then when satisfied, fully commit to moving forward on a deal. This is different than how real estate brokers often proceed with a single, “commission approved” contract.
5) Business brokers and real estate brokers use different contracts
Last but not least, it’s been my experience that real estate brokers and business brokers often come from a different frame of reference when it comes to valuing the business itself when real estate and a business are being transferred.
Often commercial real estate brokers see the business as the “Net Operating Income” that the space generates, and they are very focused on the market comparables for what other spaces are generating. And sometimes the business is not the “highest and best” use of the space…
But the business broker looks at the business from a different perspective; the “Owner’s Benefit” of the business.
If the business is separated from the real estate, how much would a future business owner benefit financially from owning the business?
What does it mean when choosing a broker(s) when selling your business?
In summary, business owners with real estate have more options for exit than business owners selling a business without real estate. For this reason, owners should consider what they need in representation when selecting a real estate broker, a business broker, or a business broker who is also a real estate broker. The focus of that professional’s practice, and the ensuing experience, credentials and processes will affect the results obtained for the business owner.