What Does My Real Estate Have To With The Value Of My Business?

Corporate owned real estate has more to do with a business owners overall wealth than it does to the value of the business. Many business owners we deal with also own the commercial real estate that their businesses operate from. Generally, business owners seem to be in tune with the value of their real estate holdings, but not necessarily how the real estate can impact the value of their business. Sophisticated purchasers will attempt to purchase the business and real estate from a business owner and proclaim that the business requires the premises to continue operations so they should be sold together as a package. While that may be true, it is vitally important to value each asset separately the business as one asset and the real estate as the second asset. Consider the case of Zenith Manufacturing in the following example, as a business that owns their real estate and how the different treatment can result in two dramatically different levels of proceeds to the owner.
Scenario A Business and Real Estate together Business A Gross EBITDA Less: Market level rent Adjusted EBITDA EBITDA Multiple Enterprise value Market level rent Real Estate Cap. Rate Real estate value Total proceeds included above $4.8 million rent not deducted from EBITDA $1.2 million $1.2 million 4.0 x $4.8 million Scenario B Business and Real Estate as separate assets rent deducted from EBITDA $1.2 million -$0.3 million $0.9 million 4.0 x $3.6 million $0.3 million 9% $3.3 million $6.9 million

As shown in Scenario B, deducting rent payments from EBITDA may seem counter intuitive in that it results in greater proceeds to the business owner. The simple reason is that commercial real estate is seen as a lower risk profile asset than an operating business. The reason is that all commercial real estate needs for it to generate a return on investment is a tenant in place that is reliably paying rent in the short term and that is expected to be in place for the long term. As a result, there is a consistent spread between real estate multiples and business multiples, reflecting the differing risk profiles of each asset.

What Does My Real Estate Have To With The Value Of My Business?

ABOUT EQUICAPITA
Equicapita is a private equity fund that acquires established, private, small and medium sized enterprises (SMEs) located primarily in Western Canada. Equicapitas investment drivers are to acquire operating companies at attractive valuations, with a history of generating sustainable cash flow and proven management teams. Equicapita believes that there is: - a generational opportunity to acquire baby boomer SMEs; and - a funding gap in the $2 to $20 million enterprise value range. The retirement of baby boomer business owners has been described as triggering one of the biggest transfers of corporate assets on record in Canada. This creates an environment with an abundance of opportunities to acquire SMEs with long-term operating histories, at attractive cash flow multiples. Equicapita provides investors with access to this alternative asset class via an efficient RRSP eligible structure.

DISCLAIMER
The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Equicapita and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither Equicapita nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to Equicapita and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting Equicapita or its relevant affiliate directly.

What Does My Real Estate Have To With The Value Of My Business?