How to Structure a Deal When the Building Kills EBITDA?

searcher profile

February 12, 2025

by a searcher from Brigham Young University Hawaii in Queen Creek, AZ, USA

I’m evaluating a business where the valuation came in at 5.5x EBITDA, which my partners and I feel is fair. The challenge is that the owner will only sell the business if the building is included.

The problem? The owner has owned the building for years and is only paying around $9,000/month. If we were to buy the building at today’s rates, our payments would jump to $22,000/month, which would eat up nearly all of the remaining EBITDA.

We’re trying to figure out how to structure this deal so it still makes financial sense. Has anyone dealt with a similar situation? I would love to hear any creative deal structures, financing options, or terms that might help make this work.

Appreciate any insights!

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commentor profile
Reply by a professional
from University of Michigan in Dallas, TX, USA
As others have said, adjust the valuation to take into account the additional lease costs. Building is purchased by an affiliated entity with a 504 loan, which might be favorable to you, depending on the relative value of the building to the overall deal. The SBA lender will generally blend your 7(a) and 504 with a single###-###-#### year maturity, which means, if the building is a relatively small percentage of the overall purchase price, you'll end up with longer than normal repayment terms on the much larger business loan and shorter than normal repayment terms on the much smaller RE loan.

Holler if I can help! Otherwise see you in Provo in a few weeks, Briggs!
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Reply by a lender
in Stuart, FL, USA
You see this a lot with private schools, day cares, funeral homes, or as you pointed out, where the seller has either owned the RE forever or the kids inherited the RE and the value of the RE is killing the deal. One thing you could consider if you are a search funder using the funds money. Buy the business for x amount and buy the RE separately. Move the business to a more suited venue and sell the RE to someone else for its best and highest use. The RE could be worth more vacant and updated than it is with the existing business that is in it. It really depends on the whole situation. The point is, sometimes you have to split things up. Also, the comments above are correct, if the seller is not paying himself market rent, the delta between the two will be a negative addback that comes right off the SDE.
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