We often represent business owners that also own the real estate where the business is located. Ideally, we like it when
the owner is indifferent whether he sells the real estate or not. Many of the businesses we sell can be sold to
individual buyers or to other companies.
Often individual business buyers will want the real estate, and often
companies will not. It is usually best
to offer the option.
Sometimes a business owner / real estate owner will not pay himself rent and the broker
doesn’t add it in. This makes the business look far more attractive
then it really is. It is important for both the seller and buyer
that a fair market rent be included the earnings number marketed with the
business. In addition, it should be one that the seller would be
happy receiving from the buyer should he keep the real estate. If the buyer elects to purchase the real
estate, we can re-do the financial analysis using loan payments instead of
Twice I’ve had sellers offer up a low rent value in
the beginning, because that boosted earnings and raised the valuation. Then half way through the process of closing
a deal with a buyer they decided a higher rent was more appropriate. That really isn’t fair, unless the valuation
is also adjusted, but they didn’t see it that way. In both cases I represented the seller, so I
had to walk a line between doing what they wanted and trying to convince them
of what I thought was the right thing to do.
Although we try to keep the valuations for business and real
estate completely separate, we have in the past blended them a little in order
to get more favorable financing. For
example, if the real estate appraises for more than the real estate selling
price, then you can move some of the value of the business into the real
estate, since real estate loans are for 25 years and business loans are
generally for 10 (interest rates are better too).
Even though we have blended them for financing, it is certainly best to make the purchase decision separately. Make sure the business stands on its own in terms of making the debt payments, producing a living wage, etc., and look at the real estate as an investment decision.