real estate added to business value
I read your article on small business valuation and have a question. It says that the assets of the business (real estate) should be added to the business value. It seems to me that this is doube counting of the real estate. if the owner of the restaurant did not own the property, then she would be paying rent. This would greatly be reducing her earnings and hence the value of the business.
So, to value the business when it had no rent separately from the real estate and then adding the two, seems to be double counting the value of the real estate. Do you agree? and if not, why?
Or should i take the proposed rent amount out of the business, lowering earnings and lowering value of business and then add real estate so as not to double count the value of ownership?
Paaul (thanks for your help)
Thank you very much for your question. My understanding is that the value of real estate should only be added to the value of a business if the real estate is being included in the sale. If the real estate is NOT included in the sale, then you should probably include the proposed rent as a projected expense for the business. This would lower the business’s EBITDA and therefore the projected valuation. I
f, however, real estate is being included in the sale of a business, then the value of that property needs to be added to the value of the business in order to come up with a reasonable valuation for the complete package. The inclusion of real estate in the purchase of a business not only lowers the business’s expenses but also increases the value of the business because you’re buying an asset that can be resold.
If you’d like to learn more about valuing a business, you’re welcome to check out our article here: https://fitsmallbusiness.com/how-to-value-a-business/
Hope this helps,