Separating Business Value from Real Estate Value
Many privately held businesses own the property from which they operate. That ownership creates additional considerations when the owner prepares for a sale. The business and real estate represent separate assets, even when the same owner controls both. Therefore, evaluating real estate and business value requires understanding the economic relationship between the company and its property. The seller must first determine whether the real estate should transfer with the business or remain separately owned.
Determine How the Business Uses the Property
Some properties serve an essential operating purpose. Manufacturing facilities, warehouses, dealerships, and specialized buildings may contain improvements specifically designed for the company’s operations. Other businesses occupy conventional offices, retail locations, or industrial properties that another tenant could readily use.
The property’s role affects the alternatives available to the seller. Where operations depend heavily on the location, a buyer may prefer ownership or long-term control of the property. A more interchangeable facility may provide greater flexibility.
Evaluate the Real Estate Separately
When appropriate, the owner should evaluate the property independently from the operating company. A real estate appraisal considers factors different from those used to value a business. Location, comparable sales, market rents, capitalization rates, zoning, condition, and highest and best use may influence property value. The property’s current use does not necessarily represent its highest and best use.
From a property standpoint, redevelopment or alternative uses may support a different value than continued business occupancy. Environmental conditions, deferred maintenance, or specialized improvements may also affect marketability.
Normalize the Company’s Occupancy Cost
Real estate ownership often affects the company’s reported earnings. An owner may charge the business above-market rent, below-market rent, or no rent. Before evaluating the operating business, the financial statements should reflect a reasonable market occupancy cost. This adjustment helps separate real estate and business value and produces a more representative earnings base. Market rent also becomes particularly relevant when the seller retains the property after closing.
Consider the Transaction Alternatives
The seller generally has several alternatives when the business owns the real estate. The buyer may acquire both the operating company and property as part of the transaction. Alternatively, the seller may retain the property and enter a long-term lease with the buyer. The seller may also sell the property separately to another real estate investor. Depending on the structure, these alternatives may produce significantly different proceeds, income streams, financing requirements, and tax consequences.
Structure the Lease Carefully
When the seller retains the property, the lease becomes an important component of the transaction. Rent should reflect market conditions and the economics assumed in the business valuation. The parties should also negotiate lease term, renewal options, maintenance responsibilities, insurance, taxes, and future rent adjustments. A buyer also needs sufficient occupancy certainty to operate the acquired business. Likewise, lenders may review the lease when evaluating transaction financing.
Evaluate the Business and Property Together
Separating the valuations does not mean evaluating the assets independently from the transaction. The business requires a place to operate, and occupancy costs directly affect its earnings. The real estate also derives economic value from its location, use, tenant, and alternative opportunities.
An experienced M&A advisor will evaluate these relationships before marketing the company. Real estate, valuation, tax, and legal professionals may also provide specialized advice where appropriate. The objective is to understand both assets separately, then structure them together around the seller’s transaction objectives.
