As a business intermediary serving business owners in the NC Triangle market, one of the most common questions I get from owners regarding the sale of their business is:
I don’t own my real estate, I lease it. Can I still sell my business?
Does it make a difference if an owner sells a business with real estate? The majority of business owners don’t own their real estate, but for those that do, it can definitely be a perk for any business buyer. That being said, owning or leasing space for a business should not make a difference in the value of a business.
In its simplest form, the business and the real estate should be owned by separate business entities. The owner of the business should pay rent to the owner of the business, whether or not he or she owns the real estate. Often owners of businesses who also own the real estate do not do this, but there are many reasons why this is beneficial, including for legal protection and tax savings.
Nearly every significant business, with the exception of e-commerce businesses, has a cost for space. For those business owners who are not charging themselves rent, the calculation of value should include an adjustment for what the cost of rent should be.
If an owner is charging him or herself rent, the question must be asked if that rent is the appropriate rate. If it’s above market rate, the next owner should be able to expect to make more money by relocating the business or adjusting down to a market rate. It’s not uncommon for an owner to charge himself more rent than market rate to reduce the profit of the business as a tax mitigation strategy.
If an owner is not expensing a rental cost or giving him or herself a “deal” on the rental rate, their business cash flow may appear higher than it is. That being said, the business & real estate owner could offer the real estate for rent at the same rental rate they are charging themselves, but more often they seek a market rate for rent, resulting in a higher operating expense and a lower net income.
An appropriate calculation of value or opinion of valuation will take into account what market rates should be and make a rental adjustment to accurately reflect the cost of the space. To summarize:
|Current Rental Rate||Market Rate||Lower than Market Rate||Higher than Market Rate|
|Adjustment Needed||No Adjustment||Negative Add Back||Positive Add Back|
|Business Value Effect||No Effect||Lowers Business Value||Raises Business Value|
Only a commercial real estate professional with access to comparable market data for similar real estate is qualified to provide market rate figures, but an owner may know what his or her peers are paying for similar properties on a price/square foot basis.
The takeaway isn’t in the exact price per square foot, but in the understanding that owners can sell their businesses whether they own their real estate or not. Furthermore for those owners who do own their real estate, it’s important to know if the rental rate is appropriate for the space.
If you own a business and have questions about the transferability of the business and the effect of the rent on the value of the business, reach out to me. I can help. It’s my role to empower owners with their options for exit.