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Often, when a Bargain Sale is considered, participants think of underutilized or distressed assets. However, a performing asset may also be sold using the Bargain Sale. A high-performing asset has a substantial revenue flow along with a profitable net operating income. When these assets are assessed for a Bargain Sale, participants may realize how the transaction is potentially enhanced.

A bargain sale may enhance the quality of a performing asset transaction by offsetting tax liabilities.

Reasons to Sell Performing Asset

There are many reasons and different schools of thought on when to sell a profitable business. According to the online magazine, Cleverism.com, the consensus among business experts and advisors is to sell when the business is doing well because that is when the business will get good offers. Therefore, after much studying and conferring with financial advisors, an asset should be sold when it puts the owner in an advantageous position. Also, the state of the economy may have definite effects on the transaction. It is believed that when the economy is doing well and the business is performing up to and beyond expectations, the ease of the transaction may be greater.

Assets are often sold for many reasons. Some occur through mergers and acquisitions. Owners may have become tired of running the business. For instance, they experience burnout if they have built the company from the start. The owner may feel he or she is getting too old to be effective. As for entrepreneurs, they may just be ready to move onto the next thing.

Evaluating a Performing Asset

Regardless of the timing and reasons for selling, the Bargain Sale may enhance the performing asset transaction. The major difference in the valuation of a performing asset versus distressed and underutilized properties is, in addition to the structure and land, the key focus is based on income. Cash flow and debt ratio are closely measured.

If a seller is willing to take a portion of the cash value in the form of tax savings, the seller may achieve an effective capitalization rate. The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. If the business is performing well with little debt, it may be evaluated with a higher value. Conversely, the business may be considered more of a risk if the business happens to be an office complex that has a few slow-paying tenants. Therefore, the greater the risk, the higher the cap rate.

Tax Benefits

Not many people enjoy paying taxes. With a Bargain Sale, the seller may avoid paying recapture taxes. Recapture taxes are income taxes on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation. Also, the Bargain Sale may offset capital gain taxes, which is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold.

There are some viable reasons why owners may not choose the Bargain Sale process. Some just believe in having cash in hand and just can’t see the tax benefits as being the same. Other sellers may not have enough liability to use the tax benefit. However, most analysts say the greatest reason is that the debt ratio may just be too high.

Bargain Sale Provides Benefit to Performing Assets

Just as with the distressed and underutilized assets, the Bargain Sale may provide the sellers with performing properties cash and tax benefits that equal or exceed the original listing price. As stated earlier, each seller may have different reasons for the timing and sale of the asset. However, each wants a deal that works to his or her advantage. The Bargain Sale may just be the answer.

Welfont’s Senior Acquisition Managers are experts with over 10 million square feet of acquisitions in more than 30 states in the U.S. We can potentially provide any answer you may have regarding your performing asset. We are very familiar with the process and are happy to serve you. If you would like more information please visit our FAQ page or email us at info@welfont.com.

Written by Joseph Garnett, Jr. – Marketing Communications Specialist  – The Welfont Group, LLC