You may come across this situation when valuing a private business: the company owns substantial real estate assets in addition to business operations. By convention, businesses are appraised as though the premises were rented rather than owned. If the company owns its premises and does not pay rent to the landowners, you need to factor a fair market rental expense into its income statement.

Consider business and real property separately in your business valuation

This puts the company on an equal footing with its industry sector peers. Remember that business value is defined by business earnings. Since it is typical for companies to lease their premises, you need to consider the effect of this expense on the business cash flow and business valuation calculations, especially with such income-based methods as the Discounted Cash Flow.

What about the business owned real property? You should determine its market value separately, as though the property were put on the market to get the highest and best renter.

The net operating income (NOI) from this arrangement along with the capitalization rate define the economic value of the property. If the business were to be put on the market, along with its real estate holdings, the value of the package would be the sum of business and real estate values, considered separately.

Valuing a business and real estate together

One business valuation method that you can use for your calculations is the well-known Multiple of Discretionary Earnings technique. As you go through your valuation analysis, input the fair market value of the real property along with any other non-operating / excess business assets. The method then lets you calculate the valuation result that combines the business and real estate values.

Business Valuation based on Multiple of Earnings

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