What is a warehousing and distribution centre worth?

A warehousing and distribution centre sells space and handling: storing, receiving, picking and shipping other companies’ goods out of an industrial building. Two different things get priced together, and they are easy to blur. One is an operating business that earns storage and handling fees. The other is a building, racking and material-handling equipment that carry value of their own. BDC, the federal Crown lender, says a valuator chooses a valuation method, or a combination of methods, depending on the type of business and the information available. This guide covers what a buyer is paying for here, what gets discounted and why two similar-looking facilities can price very differently.

Earnings or assets: which method fits

BDC explains that earnings-based methods determine value from past results and forecasted cash flow or earnings, and that market-based methods use a multiple of metrics such as earnings before interest, taxes, depreciation and amortization, a multiple that varies greatly with the industry, market conditions and other factors. It describes asset-based methods as valuing assets minus liabilities, typically used for businesses whose value is asset-related rather than operations-related, such as in the real estate sector. A warehouse operator sits between the two. If it owns its building, part of the price may be property. If it leases, the price rests on operating earnings and on what the lease lets a buyer do. A business valuator can show which method is carrying a given number. See also how to value a business that includes real estate.

Separating the operation from the property

If the owner holds the building personally or in another company, the operating company may pay little or no rent, or a rent set by the owner. Reported earnings then do not show what a third-party landlord would charge. Ask whether the statements carry rent at a level an outside landlord would accept, and whether the sale includes the building, a new lease, or neither. Pricing the operation and the property separately makes each figure easier to test. Business valuation and a real estate appraisal answer different questions.

What the space is actually earning

Square footage is not revenue. Ask how much of the floor area is under signed storage and handling agreements, how much is month-to-month use, and how much sits empty. Ask what share of revenue comes from the largest client and what the building would look like without that client. Ask whether the racking, dock doors and handling equipment match current throughput or exceed what the business can fill, and whether the site’s location is part of why clients use it.

Zoning and permitted use set the ceiling

The City of Edmonton describes zoning as a set of rules that limit the activities and buildings that can occur in a certain location, and says zoning approval is required to obtain a valid business licence. It also says a development permit is required to approve business activities that change the use previously approved at the location, subject to the exceptions its Zoning Bylaw lists. Other municipalities run their own regimes. A facility whose permitted use does not cover what it does today, or what a buyer plans to do, carries a risk that earnings alone will not show. Confirm the use with the municipality that governs the site.

The financing lens on a building

The federal Canada Small Business Financing Program guidelines state that a borrower who buys real property solely to rent it out is not an eligible borrower. A buyer and seller should therefore be clear about which part of the price is the business and which is the building, and ask a lender how it treats any part of the space that will be rented out.

Why similar facilities price differently

Two buildings of the same size can differ in value. Questions to ask about each:

• How long does the lease run, with what renewal rights, and who can end it early?
• What do the roof, dock levellers, fire protection and floors need, and is there a recent condition report?
• How much of the space earns, and how many clients would leave if one did?
• Do client agreements have termination or change-of-control terms, and who bears the risk for goods in the building?
• Does the price include the building, or only the operation and a lease?