How do you feel about real estate included in deals?

searcher profile

April 01, 2019

by a searcher from Harvard University - Harvard Business School in 126 Brewster Rd, West Hartford, CT 06117, USA

I'm curious to hear about your experiences involving real estate packaged with businesses for sale.  How did it change your view or valuation of the business? How did it change the feasibility of the deal or your financing approach?

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commentor profile
Reply by an investor
from Fort Lewis College in Denver, CO, USA
I agree with Ben above, but generally speaking I don't like real estate as part of a business acquisition. Having been a real estate investor over the last 15 years or so, I prefer not to co-mingle the two. I also base this on the premise that real estate today is generally over-valued and a correction is coming.

What makes a business acquisition attractive is the ROI/IRR on a deal at an attractive multiple. Tying capital/debt up in real estate that has a much less attractive return (when most real estate prices today are at a premium anyway) doesn't make much sense to me. Plus, usually I find it is a piece of real estate that I would never consider buying independently (without the business). You can find an appraisal (even today) to support a lot of crazy prices, so even that price "support" is suspect in my mind.

If it's an amazing business, maybe that changes the analysis. I just feel like in many cases you are overpaying for real estate with a small return, to get a business which is really all you want anyway. I would rather take the extra capital (I would use as equity for the real estate) and invest it into the business to grow/improve it substantially as that seems likely to have a much better return and potentially lower my risk.
commentor profile
Reply by an investor
from University of Notre Dame in Pittsburgh, PA, USA
You could also have it both ways and talk to "sales leaseback" company. Basically you could buy the real estate from seller as part of the deal and then sell it to an outside firm right after close and lease it back from them at a market rate - if owner is willing to sell the real estate at $X and you can sell it post close for $Y you can also arbitrage some dollars. Additionally if you are borrowing money to finance the deal you can often get extremely favorable terms (15/20 year amortization) on the real estate piece. As other have said I would look to value it stand alone vs business cash flows but make sure you adjust for 'rent' expense as the pre close business would not have any.
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