Valuation of Business & Real Estate
How To Value Both The Business & Real Estate Intertwined Together
Selecting The Right Professional
Business Enterprise Value Inaction
How To Value Both The Business & Real Estate Intertwined Together
Real estate can be viewed on a spectrum. At one end sits a generic
industrial building with the commonplace characteristics typical of its
market. With minimal or no modifications, this property could be
occupied by many types of businesses in different industries, such as
manufacturing, distributor, or a radio station. At the other end of the
spectrum, sits the business enterprise that is not dependent on the
physical structure that houses it. Finally, there is the real estate
that is special-use in design. E.g. is the building housing a steel
mill, or the farm area milk production?
Certain special-use property cannot be easily adapted for an alternative use. The required modifications are likely to be too costly to make economic sense, assuming the changes required are even physically possible. The business operation is an integral part of the real estate in this case. Between these two extremes exists a range of businesses and properties, from bowling alleys to nursing homes. Where each of these property types falls on the spectrum is a matter of opinion. However, the deciding factor is generally the extent to which the business operation depends on the real estate.
Selecting The Right Professional
The disciplines of real estate appraisal and business valuation are different and specialized. You need to involve specialists from both these fields to identify and separately value both tangible and intangible property values.
One method is separating real estate from other assets. This method is called the income approach. Under this approach, the appraiser object is to isolate the property from intangibles, (such as business trade names, franchise agreements, trademarks, existing workforce, licenses, customer lists and key employees).
Using market data, appraiser will then calculate the gross income for the property. This figure will reflect a reasonable market rent to a non-operator. The premium you are paying above this amount reflects the value that the combination property/business adds to your specific business. The net operating income (derived after subtracting appropriate expenses from the hypothetical potential gross revenue) is capitalized using a rate supported by market data and the specific business going concern operation. In theory, this method effectively isolates the real estate value. Obtaining necessary market data on rents & overall capitalization rates can be difficult although over time this will become easier.
Business Enterprise Value Inaction
To understand how business and real estate values interact, consider a hotel, operated as part of a national franchise on the date it is sold. The reported sale price typically includes payment for land and building; furniture, fixtures, equipment; franchise value; value of licenses; value of workforce in place; and the value of an established operation with an established reputation. However, because franchised hotels generally outperform independents, the buyer will pay a premium. The incremental revenue attributable to the franchise agreement is the business enterprise value. So, in this case, to attribute the entire sale price to real estate without looking at the value the hotel franchise agreement brings out is an inappropriate allocation to the business and is inaccurate. When appropriate we supply a team of specialists to make sure all aspects of the valuation are considered.
