The short version
- Real estate is valued on a different method than the business, so keep them separate
- Below market rent makes the business look more profitable than a buyer will accept
- You can sell both, lease to the buyer, sell the property alone or hold it
- Check the lease or ownership structure before going to market
Two Assets, Two Values
A company is usually valued as a multiple of earnings. Real estate is valued by income from the property, divided by a capitalization rate. Mixing the two methods leads to bad numbers.
Many buyers cannot or will not buy the building too, so plan for it to need its own strategy.
Paths You Can Take
- Sell the company and building together to one buyer
- Sell the company and stay on as landlord
- Sell the real estate to an investor, with a lease back to the operator
- Hold the property and never sell it
Some owners start out wanting a full cash out and decide to keep the property as income once they see the numbers.
Rent Is a Valuation Issue
If you pay yourself cheap rent, buyers will underwrite market rent, which lowers adjusted earnings and the multiple. What looks like a perk costs you at sale time.
A lease you set up with your own entity should be at market rates, in writing, with stated renewal terms. A month to month arrangement with no escalations is a red flag.
Owners Often Misjudge the Property
Value can be overestimated or underestimated. One owner undervalued his property by roughly forty percent before a proper review. A market rate review is worth doing either way.
Timing and Taxes
The best time to sell the property may differ from the best time to sell the company, because interest rates move property values in the opposite direction. Tax tools such as a 1031 exchange can help, but they should follow the decision, not drive it.
Where It Comes Up
Property matters most for stores with fuel, packing houses and repair shops. Your lease also shapes the earnings buyers accept.
Whichever path you pick, put it in writing early. A buyer who learns about a building issue late tends to ask for a lower price, and that costs more than fixing it yourself.
Questions to Ask First
Who would lease the building if you kept it, and for how long? What would a fair market rent be, supported by comparable leases nearby? Does the lender on the building need to approve a new tenant?
Answering these early helps you pick a path before a buyer forces the question in the middle of negotiations.
Not sure where to begin? Request a confidential valuation.