How do I value a real estate company?

To value a real estate company, start from what it owns rather than what it earns this year. BDC says asset-based approaches are typically used for businesses whose value is asset-related rather than operations-related, for example in the real estate sector. That makes the balance sheet the starting point, but not the finish line. Two specialists can be involved, and the figure you get is a guide for negotiating, not a price.

The asset-based method

BDC’s glossary describes the asset-based approach this way: information is taken from the business’s balance sheet to estimate the fair-market value of the company’s assets, and total debts are then subtracted. The result is the net asset value. If the company’s main assets are properties, the property values will carry much of the result.

Fair market value, not book value

BDC names “using the book value of assets rather than fair market value” as a valuation mistake. Book value is what the accounting records show. It can sit apart from what a property would fetch today. Ask for current property valuations and compare them with the figures on the balance sheet.

Who values what

The Appraisal Institute of Canada describes itself as the leading professional association for real property valuation in Canada. The CBV Institute says CBVs are recognized by regulatory, judicial and tax authorities as experts in business valuation. Ask whether the properties and the company as a whole will be valued by different professionals, and who will do which part. Among market-based methods, BDC’s glossary also lists segregating the real estate assets and doing a market comparison on that portion alone. If your property sits inside an operating business, see valuing a business that owns its real estate.

A guideline, not a price

BDC says a valuator’s figure is just a guideline for negotiations, and that the final price is often different. Financing, due diligence and the buyer’s own interests all influence it.