HOW TO HANDLE COMPANY-OWNED REAL ESTATE IN BUSINESS VALUATION
When your business owns its real estate—or when you hold it in a related entity—getting the valuation right can make or break your deal. The key insight: real estate and business operations require completely different valuation approaches.
The Core Problem
Most business owners make a critical error: they try to value real estate as part of the business. This doesn't work because:
- Real estate investors expect 6-15% returns
- Business buyers demand 20-30+ % returns
Mixing these creates distorted valuations that hurt both buyers and sellers.
Our Proven 3-Step Method
Step 1: Adjust to Market Rent
Set the business rent to fair market value, regardless of what's currently paid (even if it's $0).Why this matters: Buyers need to see what the business actually earns when paying real-world rent. Without this adjustment, your earnings are artificially inflated or deflated.
Step 2: Value Each Component Separately
- Business value: Based on adjusted cash flow at market rent
- Real estate value: Using standard property appraisal methods (comparables, income, cost approach)
Step 3: Add Them Together
Business value + Real estate value = Total enterprise value
Why This Method Works
- For buyers: Clear understanding of true business performance and separate property investment.
- For lenders: Each asset class can be financed appropriately with different loan structures.
- For flexibility: Buyers can purchase business-only, real estate-only, or both.
The 10% Rent Buffer
Common Concern
"What if we estimate market rent wrong?"
Good news:
Even ±10% rent estimation errors barely affect total value because the effects offset:
- Higher rent estimate: Business value drops, real estate value rises
- Lower rent estimate: Business value rises, real estate value drops
The symmetrical relationship keeps total enterprise value stable and defensible.
Real-World Applications
Manufacturing company example:
Factory owns its building worth $2M. Without rent adjustment, business shows $800K cash flow. After adding $200K market rent expense, business cash flow drops to $600K, but you capture the full $2M real estate value separately.
Result:
Cleaner financing, clearer negotiations, better total value.
Common Mistakes to Avoid
❌ Including real estate in business multiples (undervalues property)❌ Ignoring rent adjustments (misleads buyers about true business performance)❌ Using current below-market rent (creates unrealistic expectations)
✅ Separate valuations at appropriate multiples (maximizes total value)
Implementation Tips
- Get professional appraisals for both business and real estate components.
- Document market rent research with comparable properties and lease rates.
- Present both scenarios to buyers—business-only and combined transactions.
- Structure financing accordingly—SBA loans for business, commercial real estate loans for property.
The Bottom Line
Separating business and real estate valuations isn't just good practice—it's essential for maximizing your sale price and creating successful transactions. The method is logical, defensible, and creates confidence for all parties.
Planning a business sale with real estate components?
Our advisors specialize in structuring these complex valuations to optimize your total enterprise value. Contact our team to discuss your specific situation.
