Valuing a deal with real estate included in it
June 07, 2023
by a searcher from Purdue University in Mason, OH, USA
Hi there, how do you normally approach valuing a business where real estate is a component of it?
I'm currently approaching it by finding what the business is "paying" for the real estate (through a lease to the LLC that owns the land which is owned by the same) , then using that amount as a perpetuity and a target interest rate to figure out the value to assign to the land. I then take that value and add it to what I'm valuing the business at (with an EBITDA multiple)
Is that on the right track or should I be looking at it in a different way?
in Lehighton, PA 18235, USA
I've evaluated deals with these questions:. 1). What would be market rent for this building or an equivalent building that could meet the needs of the business? I then adjust financials to account for that rent cost. 2). What should the business be valued at after factoring in market rents and not including any real estate value? 3). Would I purchase the business at this price, not including real estate? If the answer to #3 is yes, then move to #4.
4). If I already owned the business, would it make financial sense to purchase this building rather than leasing space? If the answer here is yes or even maybe, then I would consider purchasing the real estate on a 20-year note, or at least securing an option to purchase in the next few years or right of first refusal.
Evaluating the situation this way makes much more sense to me. A real estate purchase for a business should be evaluated completely differently than the business itself. The real estate purchase is not strictly an investment. It's also a way of hedging against increased costs in the future. I don't feel the two can be accurately evaluated together using the same criteria
from Harvard University in Boston, MA, USA