One of the most complex decisions in a preschool sale — and one most sellers haven’t thought through carefully — is what to do with the real estate. If you own the building your school operates in, you have a meaningful strategic choice that will affect your total sale proceeds, your tax situation, and your post-sale financial picture. Understanding this decision before you’re in a negotiation is essential.

The Three Real Estate Scenarios in a Preschool Sale

Scenario 1: You Lease and Don’t Own the Property

This is the most common situation. The business sale focuses on the operating business — cash flow, enrollment, staff, goodwill, and equipment. Your lease is a key asset (see L is for Lease), but the real estate itself doesn’t factor into the transaction structure. Your focus should be on having a transferable lease with adequate remaining term and a cooperative landlord.

Scenario 2: You Own the Property and Sell It With the Business

If you own the building, you can sell the real estate along with the business in a combined transaction. This simplifies the deal structure (one buyer, one closing) and can be attractive to owner-users who want to control long-term occupancy costs.

The challenge: real estate is valued differently than a business. Commercial real estate is valued based on comparable sales and cap rates. A preschool building in suburban Texas might appraise at $800,000–$1,200,000 for a 6,000–10,000 SF facility. Combined with a $600,000 business value, you’re looking at a $1.4M–$1.8M total transaction — which requires a larger buyer and reduces your qualified buyer pool.

Scenario 3: You Own the Property and Do a Sale-Leaseback

This is often the most financially optimal strategy for owners who own their building. Here’s how it works:

1. You sell the business (the operating entity, lease rights) to one buyer.
2. Separately, you sell the real estate to a real estate investor — or retain it yourself and become the landlord to the new business owner.

Why is this often the best approach? Because it separates two different asset types and lets each be valued optimally by the right buyer. Business buyers pay based on cash flow multiples (2.5x–3.5x SDE). Real estate investors pay based on cap rates — annual rent income divided by the cap rate. A preschool property leased at $8,000/month ($96,000/year) might sell at a 6–7% cap rate, implying real estate value of $1.37M–$1.6M.

Combined with a $600,000 business sale, a sale-leaseback structure could yield $1.97M–$2.2M total — versus a combined sale that might net $1.5M–$1.7M. The same assets, structured differently, create significantly more value.

Tax Implications of Real Estate in a Preschool Sale

• Depreciation recapture: If you’ve been depreciating the building, the IRS requires you to “recapture” that depreciation when you sell — taxed at a maximum 25% rate, not the lower capital gains rate.
• 1031 Exchange: If you own real estate and want to defer tax, a 1031 exchange allows you to roll proceeds from your building sale into another investment property, deferring capital gains until that new property is sold.
• Business goodwill proceeds: Taxed as long-term capital gains — a lower rate than ordinary income.

What to Do If You Own Your Building

1. Get an appraisal of the real estate separate from the business. Know what you’re working with before any buyer conversation.
2. Understand your depreciation schedule and talk to your CPA about recapture implications.
3. Explore the sale-leaseback option with your agent before assuming a combined sale is the right structure.
4. If you’re open to retaining the real estate and becoming a landlord, price your business with a market-rate lease already in place — it signals stability to business buyers and keeps your real estate income running post-sale.

What This Means for You

Whether you own or lease, real estate is a deal-shaping variable. Owners who understand their options — combined sale, sale-leaseback, or retained ownership — can structure the transaction to maximize total proceeds and minimize tax exposure. Getting expert advice on this piece of the puzzle early in the process is worth far more than the cost of the conversation.