🏢 How to Buy a Business With Real Estate, Sell It, and Lease It Back

A PE fund recently bought an automotive care center doing $500K in EBITDA. The total purchase price was $2.4M, with roughly $1M tied up in real estate. At closing, they flipped the real estate to a REIT for $1.8M—creating an $800K gain before they even operated the business for a single day. This example comes from Eric Pacifici at SMB Law Group, and it perfectly illustrates the power of a sale-leaseback.

Net result: they effectively paid $600K for a business generating $500K annually. Because this was a tuck-in to an existing platform with multiple expansion, that $500K of cash flow was worth roughly $4M inside their portfolio.

It's one of the most underutilized tools in small business acquisitions.

EBIT NAPKIN MATH

This is the entire game.

What Is a Sale-Leaseback?

A sale-leaseback is exactly what it sounds like: you buy a business that owns its real estate, sell that real estate to an investor, and immediately lease it back from them. You retain full operational control of the property while converting an illiquid asset into cash.

The buyer of the real estate—typically a REIT, family office, or real estate investor—gets a stabilized, cash-flowing asset with a built-in tenant (you). You get immediate liquidity and a lower effective purchase price for the operating business.

Why This Works for Searchers

Most sellers price their businesses based on total asset value. They lump operating income and real estate together, often undervaluing one or the other. This creates arbitrage.

Real estate investors value property based on cap rates and comparable sales. Business buyers value companies based on EBITDA multiples and cash flow. When a business owns its building, the seller usually isn't optimizing for both markets simultaneously—they're just trying to get a fair total price.

That gap is your opportunity.

Here's how real estate investors actually price these deals. They look at the net operating income (NOI) from the property—essentially the rent minus any landlord expenses—and apply a cap rate based on the market and property type. If a property generates $120K in annual rent on a triple-net lease and investors are buying at a 7% cap rate, they'll pay roughly $1.7M for it. At a 6% cap, that same property is worth $2M. The business seller probably isn't thinking in these terms.

Here's the math from the example above: The seller wanted $2.4M total. About $1M of that was real estate value (in their mind). But a REIT looking at a stabilized commercial property with a long-term tenant paid $1.8M for that same real estate. The $800K difference went straight into the buyer's pocket, reducing their effective basis in the operating company.

How to Execute a Sale-Leaseback

Step 1: Identify the opportunity. Look for businesses where real estate is included in the sale and represents a meaningful portion of the purchase price. Good candidates include auto shops, medical practices, restaurants, manufacturing facilities, and service businesses with dedicated facilities. The property should be in reasonable condition and located in a market where investors are active.

Step 2: Get the real estate valued separately. Before you make an offer on the business, get a sense of what the real estate alone would sell for. Talk to commercial real estate brokers. Look at comparable sales. Understand what cap rate investors would pay for a property like this with a creditworthy tenant in place.

Step 3: Structure your acquisition. You can either buy the whole business (including real estate) and immediately sell the property, or you can work with the seller to carve out the real estate before closing. The first approach is cleaner but requires more capital at closing. The second requires seller cooperation but can be more capital-efficient.

Step 4: Line up your real estate buyer. Start conversations with potential buyers early—ideally during due diligence. Here's the reality for smaller deals: institutional REITs typically want $5M+ transactions, so they're out for most searcher acquisitions. Your buyers are more likely to be 1031 exchange investors looking to defer capital gains, local high-net-worth individuals who want passive income, small private equity real estate funds, or family offices. For most net-lease buyers, tenant durability and lease length matter more than the real estate itself. Commercial real estate brokers who specialize in net-lease properties can connect you with these buyers. You'll need to present them with property financials, your business plan, and the lease terms you're proposing.

Step 5: Negotiate the lease terms carefully. This is where deals get made or broken. The lease you sign as a tenant affects both the sale price of the real estate and your ongoing operating costs. Here's what's typical in sale-leaseback transactions: initial terms of 10-15 years with two or three 5-year renewal options, annual rent escalators of 2-3% (or CPI-linked), and triple-net (NNN) structure where you pay property taxes, insurance, and maintenance. Longer leases with built-in escalations command higher prices from real estate buyers but lock you into rising costs. Know what you're signing up for.

Step 6: Close simultaneously or sequentially. Ideally, you close the business acquisition and the real estate sale on the same day or within days of each other. This minimizes your capital exposure. Some deals close sequentially, with the real estate sale following the business acquisition by weeks or months—this requires bridge financing.

What Can Go Wrong

Sale-leasebacks don't create value—they pull it forward. Plenty of sophisticated buyers have gotten burned.

The Red Lobster disaster. When Darden sold Red Lobster to Golden Gate Capital in 2014, they executed a massive sale-leaseback. Golden Gate extracted $1.5 billion by selling the real estate and signing long-term leases. The problem: Red Lobster's operating business couldn't support the lease payments. The company filed for bankruptcy in 2024, with lease obligations cited as a major factor. The PE fund got their money out, but they destroyed the business in the process. The sale-leaseback worked perfectly—just not for the operating company.

Lease payments must fit the business model. Before you commit to any lease, model out your cash flows under stress scenarios. What happens if revenue drops 20%? What if you need to make capital improvements? The lease is a fixed cost that doesn't flex with your business.

If annual rent exceeds 20% of EBITDA, assume you are levering the business for failure. 25% only works with exceptional margins and zero volatility.

You're trading one personal guarantee for another. If you're using SBA financing, you're already personally guaranteeing a loan. When you sign a long-term lease, you're likely signing a personal guarantee on that too—especially as a new owner without years of operating history. Understand that you're not eliminating liability, you're restructuring it. The lease guarantee survives even if you sell the business, unless you negotiate a release with the landlord.

Capital gains taxes. If you sell real estate for more than the allocated basis, you'll owe capital gains. In the example above, if the real estate was allocated at $1M in the purchase agreement and sold for $1.8M, there's an $800K gain that's taxable. This is where purchase price allocation matters. Work with your CPA during the acquisition to allocate value between real estate, equipment, goodwill, and other assets in a way that's defensible and tax-efficient. You can't arbitrarily assign values—the IRS requires reasonable allocations—but there's often legitimate flexibility in how you slice it.

Landlord risk. Once you sell the real estate, you're a tenant. Your new landlord might be reasonable, or they might not. They might sell the property to someone else. Your lease terms are your only protection. Make sure they include options to renew, limitations on rent increases, and clear terms for any improvements or alterations you might need to make.

Exit implications. When it's time to sell your business, the lease becomes part of the package. Some buyers see a long-term lease as a positive—predictable occupancy costs, no capital tied up in real estate. Others see it as a liability, especially if the lease has above-market rent or unfavorable terms. Businesses that own their real estate often command slightly higher multiples because buyers have more flexibility. Factor this into your long-term planning.

The exit landmine most buyers miss: If your lease rent is above market by the time you sell, sophisticated buyers will recharacterize it. They'll haircut your EBITDA down to what earnings would be at market rent. That $800K gain you extracted on day one? You just gave it back on exit through a lower multiple on lower adjusted earnings.

SBA loan complications.

Here's what most searchers miss: SBA business acquisition debt typically amortizes over 10 years. But when real estate is included, lenders can extend the term to 25 years—cutting your monthly payment nearly in half. Selling the real estate removes the justification for that longer term. The lender may require proceeds go toward paydown, recast your loan to a shorter amortization, or refuse to release the lien entirely.

Rule: If SBA financed the real estate, assume you cannot sell it without written lender approval or refinancing.

When It Makes Sense

A sale-leaseback is most powerful when the real estate is undervalued relative to the market, you need to reduce your equity requirement to close the deal, the business has strong enough cash flows to comfortably cover lease payments, or you're building a platform and want to deploy capital into operations rather than real estate.

It's less attractive when the real estate is already priced at market value, the business operates on thin margins, you plan to expand or modify the facility significantly, or you want the long-term appreciation of owning the property.

The Bottom Line

Sale-leasebacks let you arbitrage between two different markets: real estate investors and business buyers. Done right, you can dramatically reduce your effective purchase price and accelerate your returns. Done wrong, you saddle your new business with fixed costs it can't support.

Before you execute, make sure you can check every box:

If all four clear, a sale-leaseback is a weapon. If not, it's leverage in disguise.

Structure the lease like you plan to own the mistake.

Disclaimer: This guide is for educational purposes only and does not constitute legal, financial, tax, or investment advice. Business acquisitions involve significant risks, and outcomes can vary widely based on individual circumstances. Always consult with qualified professionals including attorneys, CPAs, and financial advisors before making acquisition decisions. The EBIT Community does not guarantee the accuracy of information provided or the success of any acquisition strategy. Past performance and examples do not guarantee future results.