How do I value a business that owns its real estate?

When a business owns the building it operates from, the sale price question actually splits into two separate valuations that get combined. The operating business is valued on its earnings, the way any business would be, while the real estate is valued as real property, using comparable sales and market rent, the way any commercial building would be. Mixing the two into one earnings multiple usually produces a distorted number.

If rent is not charged to the operating business because the owner also owns the building, the earnings figure used for the operating business’s multiple has to be adjusted to include a fair market rent expense first. Skipping this step overstates the operating company’s earnings and, by extension, overstates what a multiple-based price should be for the business alone.

The real estate is typically valued with a real property appraisal based on comparable commercial sales, current market rent, and the condition and use of the building, independent of how the operating business is performing. A struggling business can still sit inside a valuable building, and a strong business can operate from a building worth very little, the two numbers do not move together.

• Sell the operating business and the real estate together as one combined transaction
• Sell only the operating business and lease the building to the new owner going forward
• Sell the real estate separately, on its own timeline, to a different buyer entirely
• Hold the real estate in a separate corporation from the outset, which simplifies any future split

Real estate included in a deal generally provides stronger collateral than an earnings-based purchase alone, which can support more favourable financing terms, longer amortization, or a higher loan amount relative to the operating business portion. Lenders will typically want the two components valued and documented separately, even when they are financed together.