Our operating business leases its facility from an LLC owned by the founders, and equipment purchases have been split across entities. How do we untangle these related-party assets before launching a sale process?

Question

Tyler Smith · Accepted Answer

Many privately held businesses commingle assets between the operating company and founder-owned entities, particularly when real estate, equipment, or intellectual property is held in separate LLCs. If you approach a sale without cleaning up these arrangements, buyers will view them as operational conflicts of interest and adjust their valuation downward.

Begin by establishing arm-length, market-rate commercial leases between your operating company and your property holding company at least two to three years before going to market. If your operating business has been paying below-market rent to inflate EBITDA, or above-market rent to extract cash for tax optimization, institutional buyers will normalize the expense during quality of earnings due diligence. An independent real estate appraisal establishes defensible lease terms that can transfer cleanly to a buyer or survive your retention of the physical building.

Audit your balance sheet for non-operating assets. Vehicles, personal equipment, notes receivable from owners, and intercompany loans between related businesses must be formally settled and removed. If key operating intellectual property, patents, or software licenses are registered to you individually or to a holding company, execute legal assignments to transfer complete ownership directly to the operating entity being sold.

Presenting a pristine balance sheet free of related-party encumbrances proves operational independence. It allows buyers to assess true operating performance without deducting heavy administrative costs to renegotiate basic facility leases or legally clean up asset titles during closing.