Insights

Many Atlantic Canadian business owners have accumulated two significant assets over their working lives: the operating business itself, and the property it operates from. The building the shop floor occupies, the yard the equipment is stored in, the retail or warehouse facility that the company has outgrown twice and expanded once — these properties, owned by the company or by the owner personally in the same corporate structure as the business, represent substantial value.

When the time comes to sell the business, a common default assumption is that the real estate comes with it. The buyer gets the business and the building. One transaction, one price, done.

In most cases, this default assumption costs the owner money. Often significant money.

Why Separation Is Almost Always the Better Structure

The operating business you've built has value because of its earnings — the EBITDA it generates, the customers it serves, the workforce it employs. Buyers value it by applying a multiple to those earnings. A business generating $900,000 in EBITDA at a 4.5× multiple is worth $4.05 million.

The real estate has value because of its location, size, condition, and market comparables. An industrial building in Dartmouth, Moncton, or Fredericton is appraised as real property, not as a business asset. Its value might be $1.5 million, $2 million, or more depending on the property.

When you sell the business and the building together to a single buyer, several things happen that work against you:

Some buyers don't want the real estate at all — but will take an option. Many strategic and financial buyers prefer to lease, not own, the facilities they operate. They want to deploy their acquisition capital into the business — the earning assets — not into industrial property. When the deal requires them to acquire real estate they don't want, they typically discount the combined price to account for the capital they're tying up in property. A better structure for this buyer type: sell them the operating business, retain the property in a PropCo, and include a purchase option in the lease at a fixed or formula-based price. This gives the buyer flexibility without forcing you to sell the property at a bundled discount.

Other buyers specifically want the real estate — and it's actually easier for them to finance. Strategic buyers with expansion plans, or buyers whose lenders prefer asset-backed security, sometimes do want to acquire the property alongside the business. For this buyer type, industrial real estate is a financing advantage, not a complication — it provides collateral that makes their acquisition financing more accessible. In these cases, the property can be structured as a separate purchase priced on real estate terms rather than blended into the EBITDA multiple transaction. Either way, the separation structure gives you more options, not fewer.

The real estate gets blended into the business valuation. An industrial building is not worth five times EBITDA. But when it's bundled into the business sale, it gets priced as part of an EBITDA-multiple transaction rather than on its standalone property merits. The seller loses the property's intrinsic value.

The ongoing rental income disappears. If you separate the real estate and lease it to the buyer, you retain a predictable, long-term income stream after the business is sold. That rental income stream has its own capital value. You lose it entirely when you sell the property with the business.

The separation structure — commonly called an OpCo/PropCo structure — addresses all of these problems. The buyer acquires the operating company (OpCo). The seller retains the property company (PropCo). The buyer leases the premises from the seller under a long-term lease with market-rate terms. The total economics of the two transactions separately are almost always superior to the bundled total.

How the OpCo/PropCo Structure Works

In practice, the structure involves transferring the real property from wherever it currently sits — inside the operating company, in a personal name, or in an existing holdco — to a dedicated property entity. The property entity then enters into a lease with the operating company at a fair market rent that represents the arm's-length cost of occupying the space.

From the buyer's perspective, they are acquiring the operating company subject to a lease for the premises. They have operating use of the facility under a defined lease term with renewal options, without the capital commitment of acquiring the real estate. Most sophisticated buyers expect this structure; it's the standard approach in mid-market manufacturing and industrial transactions.

From the seller's perspective, the math typically looks like this: you sell the operating company at its EBITDA multiple, receiving a transaction price that reflects the business's earning power. You retain the property, which generates rental income from the buyer at market rates. The property can then be:

• Held indefinitely, generating rental income as a passive investment within the PropCo
• Sold separately at a later date, potentially in a more favourable real estate market
• Used as part of your estate planning — a specific, well-documented asset that can be managed or transferred on its own terms

What Buyers Think About This Structure

The most common concern sellers have about proposing the OpCo/PropCo structure is whether buyers will push back. In the Atlantic Canadian context, experience shows that most serious mid-market buyers accept and even prefer this structure, for the reasons already noted: they prefer not to tie up capital in real estate, and they understand the transaction mechanics well enough to work within them.

What buyers will negotiate is the lease. They want lease terms that are commercially reasonable, that don't create operational risk, and that provide them with tenure security long enough to justify their investment in the acquisition. Specifically, buyers typically want:

• An initial lease term of five to ten years
• Multiple renewal options that allow them to extend well beyond the initial term
• Reasonable rent (at or near market rate — not a premium imposed by the seller as the new landlord)
• Clear definition of maintenance responsibilities between landlord and tenant
• A purchase option, sometimes, at a defined or formula-based price

These are reasonable terms, and negotiating them is straightforward compared to the alternative of arguing about whether the bundled property is worth its standalone value in an EBITDA-multiple transaction.

The exception to the general buyer preference for leasing: strategic buyers who specifically need to own the property — perhaps because of future expansion plans, because the property's location is strategically critical, or because their financing structure requires it. In these cases, the sale of the property can be structured as a separate transaction, priced on real estate terms rather than business terms. Either way, separation improves the outcome.

The Tax Mechanics of Separation

Transferring property from one entity to another, even between related companies, has tax implications that must be carefully managed.

Capital gains on the transfer. When real estate is transferred between related entities, the transfer is typically done at fair market value (FMV). If the property has appreciated since it was acquired — which most Atlantic Canadian industrial property has over the past decade — the transferring entity realizes a capital gain. In some cases, related-party rollovers under Section 85 of the Income Tax Act can defer this gain by allowing the transfer at the property's adjusted cost base rather than FMV. Whether a Section 85 rollover is appropriate depends on the specific structure and goals, and should be evaluated with your accountant.

Land transfer tax. Transferring real property between related corporations typically triggers provincial land transfer tax, which in Atlantic Canadian provinces ranges from roughly 1% to 1.5% of the property's FMV (with some variation and exemptions). This is a cost of the restructuring that needs to be factored into the timing and economics. It is generally worth paying — the benefit of the separation structure typically outweighs the land transfer cost — but it should be calculated explicitly.

The arm's-length lease requirement. The lease between PropCo and OpCo must reflect fair market rent. A below-market lease suppresses the operating company's reported EBITDA (because EBITDA is calculated after rent expense) — which reduces the operating company's valuation. A below-market lease is, effectively, a subsidy to the buyer. An above-market lease inflates EBITDA artificially and will be normalized by buyers in their QofE analysis. The right rent is the market rent, confirmed by a real estate professional, documented as the basis for the lease agreement.

Timing: Why You Can't Do This Six Months Before a Sale

The optimal window for structuring the OpCo/PropCo separation is two to three years before a planned sale. The reasons compound:

The land transfer taxes and potential capital gains need to be absorbed and settled before buyers examine the corporate structure. A property transfer that occurred six months before the sale will be scrutinized — buyers and their accountants will want to understand why it happened, whether it was done at arm's length, and whether there are any CRA exposure concerns. A transfer that happened two years ago is historical background, not a current red flag.

The lease needs to establish a track record. A lease that has been in place for two years, with consistent rent payments at documented market rates, is credible. A lease executed last month, for the purpose of a pending transaction, invites the question of whether it will actually be honored on the terms stated.

Your holdco or corporate structure may need to be reorganized to accommodate the PropCo, and those reorganizations have their own timing requirements — particularly if they involve issuing new shares that need to satisfy 24-month QSBC holding period requirements.

The Bottom Line

If you own the property your business operates from, the separation question is one of the most important pre-sale planning decisions you will make. It is almost certainly worth doing. It requires time to do properly. And the owners who approach it with enough lead time — who have a clean, long-standing OpCo/PropCo structure in place when buyers come knocking — consistently achieve better aggregate outcomes than those who sell everything together or who attempt last-minute restructuring.

The conversation with your M&A advisor and accountant about property separation should happen when you first start thinking seriously about an eventual sale — not when you're drafting the CIM.

Want to understand how separating your real estate might affect your transaction and your after-sale income? Book a confidential consultation with Conexus M&A. We help Atlantic Canadian business owners structure their exits to maximize both the sale price and the long-term asset base they retain.