Evaluation Real Estate within Acquisition

February 26, 2024

by a searcher in Berlin, Germany

Dear Searchers,

I am performing a self funded search in Germany and meanwhile came across several deals where the real estate is part of the transaction. However, in all the cases so far, the owners seem to evaluate the associated property way higher than I do. Those are commercial properties that are necessary to run the business and closely attached to the business itself. I am therefore applying a valuation that combines real estate and business, and apply a discount on the property evaluation to the standalone market price. This is mainly based on assuming that the business cannot be easily transferred to another location, while the overall return for the seller of selling company + real estate will always be higher rather than closing the business and just selling the real estate.

It seems however that owners are still sticking to their high price expectations because a Real Estate Agent told them their property would sell xyz. I start to believe that there is a major downside in businesses that own the real estate and would be really interested how you guys evaluate and calculate those kinds of deals?

Thanks in advance! Cheers,
Jonas

Reply by a searcher
in New York, NY, USA

I found it useful to take the seller through a proceeds illustration. As you point out, they cannot sell the business without the real estate attached (either via sale or long-term lease), so the way they maximize total proceeds is likely to accept a slight discount on the CRE.

Also may be worth exploring a sale leaseback so you can acquire the real estate without having to raise additional capital. Note that depending on historical rents, there would likely have to be an adjustment to go-forward rents (simple cap rate calc; SLB investors would expect 7-9% of property value for annual rent).

It is also worth looking into your optionality to move the business into a new space. If the sellers are stubborn on the real estate piece (large bid/ask spread), and you could get comfortable with the business disruption risk, this is potentially the only solution. Though this depends how keen your are on the business, as moving on may be the best option.

Reply by a searcher
from Concordia University in Toronto, ON, Canada

RE and business are two different asset classes and should be evaluated individually, even if you provide a combined offer. However, doing so make sure that a market rate rent cost is included in the operating expenses of the business. The owner may have some tax advantages selling them combined in a share sales, that you can negotiate to take a bit out of it.

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