The Importance of Real Estate in a Merger or Acquisition

Published on February 14, 2024

Recently, I helped organize and participate in a conference called Conquering the M&A Game. It was a fantastic event held at the JP-Morgan Headquarters in Palo Alto with a few hundred attendees. The conference aimed to give insights into all the steps before, during, and after an M&A transaction. Even with all the extensive planning, it was only after the event that I realized an important aspect had been overlooked - the significance of real estate in the transaction. This realization came from a conversation with Sam Millward, a commercial real estate expert who attended the conference. He rightfully pointed out that real estate plays a crucial role in M&A deals and deserves attention. Let's explore our conversation and why this topic will be on the agenda at our next M&A event later this year.

One of the first things done in a transaction is for the seller to construct a data room (a set of folders that house the ins and outs of a business). Think of it like a safe deposit box that holds crucial information pertinent to the company, such as financial records, an org chart, articles of incorporation, etc. In the data room, a whole section might be related to real estate-related documents. These documents cannot be gathered at the 11th hour or right when the deal is about to close. They need to be there from the beginning due to the severe impact they can have in dictating the entire transaction. Some documents that could be there include information on the lease agreement or if the business owns the building, documents related to the building purchase, environmental reports, construction permits, and more.

Panel on Preparing a Company for a Transaction

When it comes to the real estate component of an M&A deal where the owner owns the property and the business, this raises some interesting questions. Even though it is one owner, is the real estate and business held in one entity or separate entities? Could this be one sale with the company and another of the property? If the buyer wants to buy both, what happens in due diligence if the appraisal for the building comes in lower than expected? Would the deal still make sense? What would happen if, when looking at the business numbers, they were not as nice as what was advertised? What type of adjustments will be made to the sale's purchase price or deal structure? What about the relationship between the business and the property; does the business only make sense to operate with a rent that might be way below market rate? So many questions arise regarding the relationship between the property and the company that if this is not discussed at the beginning, a transaction's chance of falling apart is exponentially increased.

Let’s say that the business leases the office/building; you might think that this makes things easier, unlike all the scenarios mentioned above. Hold on a moment; in M&A; nothing is easy… Some questions that might come up could be around the terms and conditions of the lease agreement. The remaining duration of the lease becomes a vital factor for both the buyer and the seller. If the lease is nearing expiration, what does it look like to renew it? Is the landlord open to that conversation or not? Imagine buying a business only to discover that the building owner is not renewing your lease in a year. That could be the kiss of death for the business, or what if that is the ideal situation? Maybe that could be a valuable component of the deal. Perhaps the work structure of the acquiring company is fully remote. They were planning on converting the selling company to their business model and have modeled out the increase in margins due to not having a rental expense, and they can’t wait for the lease to end… who knows, is what I’m saying. Each buyer is different, but not knowing the information leads to not being able to have a real discussion.

Shawn introducing the next Panel on post Close.

I'd like to circle back to the work requirements above about working in different business settings. What happens to real estate considerations if the acquiring company operates from a centralized office while the target company is remote and the acquiring company wants to bring most of the company’s employees to their building? In that case, the real estate needs to accommodate the combined workforce. The physical space may require reconfiguration or expansion to ensure the smooth integration of teams. Let's look at a company with a “landlocked” building component. With a remote workforce, talent can be recruited from anywhere; now, the proximity to the skills needed to grow the company, such as engineering talent, means they must live within driving distance. This can significantly impact the business's growth opportunities to explore global talent but may increase the internal emotional connection of the company employees. The impact on talent retention, customer base, and overall growth plans must be evaluated.

I am going down a rabbit hole on this. In summary, real estate plays a crucial role in many M&A transactions. I want to thank all the amazing people who helped organize the event and Sam Millard for highlighting this essential aspect and to all who attended the conference; we will cover this and many other topics at the next event.

With that, Follow me on LinkedIn for updates and additional M&A-focused content.

*** The content is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional(s) before entering into any M&A transaction. ***

For More Information

Shawn Flynn is a Principal at Global Capital Markets, a premier middle-market investment bank with a global presence. Shawn has expertise in mergers and acquisitions, capital markets, financial restructuring, and secondaries. He speaks Mandarin and is the host of the award-winning Podcast The Silicon Valley Podcast. Connect with him on LinkedIn.

Shawn Flynn, Principal SF@GlobalCapitalMarkets.com

Tel (415) 578-1445 Ext. 4

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