How to handle company-owned real estate in business value
When a business owns its real estate—or when the owners hold it in a closely related entity—accurately valuing both the operations and the property is essential. Trying to include the real estate in the business value typically isn’t fair to the seller because real estate typically demands an ROI of 6-15% whereas businesses typically demand an ROI of 20-30% (depending on many factors). At Optimum Transitions, we follow a clear, consistent approach:
Adjust the business earnings to reflect a fair market rent, no matter what rent is currently charged - even zero.
Value the real estate separately.
Add the two values together for the total picture.
This method keeps the analysis clean, credible, and transparent. Here’s why it makes sense.
Why Adjust to Market Rent First
If the business is paying no rent or rent that’s far below (or above) market rates, the earnings are distorted. A potential buyer will want to know what the business would earn if it had to pay fair rent for the property—because in most cases, that’s the reality they’ll face.
By adjusting to market rent before valuing the business, we separate “operating performance” from “property ownership.” This means the business valuation reflects what the buyer is actually buying: the cash flow from operations, not an artificially inflated or reduced number due to unusual rent terms.
Valuing the Real Estate Separately
Once the business is adjusted for market rent, the real estate can be appraised using standard real estate valuation approaches (market comparables, income, and/or cost). This number reflects what the property is worth in the market, independent of who owns or operates the business. It isn’t fair to a seller to consider the real estate a business asset since real estate is less risky than business. It isn’t fair to the buyer to add the real estate value to the business value without first making a rent adjustment.
By keeping the two valuations separate, we:
Make it easier for lenders to finance each component appropriately.
Allow for different buyers—some may want both business and real estate, others only one.
Increase transparency for negotiations.
Bringing It Together
After both valuations are complete, we simply add the business value (post-market rent adjustment) to the real estate value. The result is a clear, defensible total value.
The 10% Market Rent Sensitivity
Illustrates how when real estate value (and rent) go up, business value goes down and vice-versa minimizing the effects of being off ±/- 10% in the real estate (rent) price.
A common question is: What if we’re wrong about the market rent?
Here’s the good news: even if our market rent estimate is off by ±10%, the total combined value changes very little.
Why? Because the effect is symmetrical:
If rent is higher, the business value goes down, but the real estate value goes up.
If rent is lower, the business value goes up, but the real estate value goes down.
In other words, most of the difference cancels out, keeping the total value stable. This gives buyers and sellers confidence that the valuation isn’t overly sensitive to small rent estimation errors.
Visualizing the Process
Simple graphic illustrates how we bring the business value and the real estate value together for the total value of the enterprise. When the enterprise owns the real estate.
Conclusion
When valuing a business with significant real estate—especially when the property is owned by the business or a related party—the most logical, fair, and defensible approach is:
Adjust the business earnings to market rent.
Value the business.
Value the real estate separately.
Add them together.
At Optimum Transitions, we’ve found this method not only produces accurate results but also instills confidence in both buyers and sellers, making negotiations smoother and deals more successful.