The valuation of the business premises is often an important part of an acquisition transaction. It is not always handled correctly in practice.
It is important to first ask whether the property is operationally related or not. In the example of a wellness center, crematorium or golf course, this is obvious. But even in a factory with complex technical installations and production processes, the business activity actually consists of operating the real estate. In other words, the real estate is a means of production. The value of the real estate is then equal to the value that can be realized with the operational activities. No separate valuation is then made of the real estate.
Non-operating business property
With non-operating property such as an office building, warehouse or retail property, the situation is more nuanced. Of course, a wholesaler has requirements for the layout of his business premises, but the money is made from the trade. The real estate is only a tool in this respect. The activities can easily be carried out in other premises. With non-operating real estate, therefore, two valuations are often made. One for the value of the business activities and one for the real estate. This is because return requirements for real estate are lower than those for operating activities because the risks are lower. It is then important to make a proper "notional" accounting split between the operational value and the value of the real estate. Consider a proper allocation of operational costs for the real estate (insurance/maintenance/depreciation) and allocation of part of the interest-bearing debt.
Check out our tips on how to value a business:
Real rent
For the operational value, it is important that a real rent is allocated to the operation. This rental value is often determined on the basis of an appraisal report that takes into account, for example, recent transactions, overdue maintenance or ground leases. Therefore, you often see that the real estate is already placed in a separate real estate BV and that the property is then leased by the operating company. It is still important to check whether the rent is realistic.
Individual property valuation
When dealing with a current office building or business premises, a separate valuation of the property is certainly advisable. After all, the cost of capital is usually lower because the risks are also lower. Distinguishing between the value of the operational activities and the real estate also creates a more realistic and professional picture of the actual value of the business.
