Every business needs real estate, whether it’s commercial office space, a retail store, a manufacturing facility or a home office. If a valuation is needed, should you use a business valuation professional, a real estate appraiser or both? The answer depends on the relationship between the real estate and the business.
Real Estate Holding Companies
If the business being valued earns its revenue primarily from owning, selling or leasing commercial or residential real property, then a real estate appraiser will often be the primary valuation professional. However, a business valuator may be needed to assess the impact of the company’s structure on value, especially when other (non-real estate) assets and liabilities are involved.
Suppose that a real estate holding firm is structured as a limited liability company. If a minority interest is being valued, a business valuator might calculate discounts for lack of control and lack of marketability.
Hybrid Businesses
On the other hand, if real estate is incidental to a business’s operations, a valuator would likely take the lead. This may be the case, for example, if a company that produces or provides goods or services owns its facility or facilities, but the location or characteristics of the real estate aren’t key factors in its financial performance.
If a business acquires real estate as an investment, whether a real estate appraiser is needed depends on the significance of the business’s real estate holdings in relation to its overall value. Often, the value of non-real-estate businesses — such as retail shops, restaurants, hotels, marinas, cemeteries and golf courses — is tied to their location or the special characteristics of their real property. This also may be true for hospitals or certain manufacturers that rely on specialized equipment, fixtures and structural accommodations that aren’t readily moved or duplicated.
Custom Approach
In some cases, engaging both a real estate appraiser to determine the standalone value of the real property and a business valuator to determine a separate value for the business may produce more accurate results.
For instance, a real estate appraiser might be hired to determine the real property’s fair market rental value. The business valuator might use that value to impute hypothetical rental expense to the business, reducing the company’s earnings or cash flows for business valuation purposes, and arrive at a value for the company apart from the real estate. Then that value can be combined with the appraised value of the real estate to determine total enterprise value.
It’s Complicated
Matters involving the valuation of businesses that own real estate tend to get complicated. Your business valuation experts can advise you on what’s appropriate for your situation.
TheKFORDgroup litigation team holds extensive knowledge and experience in expert witness engagements, forensic accounting, and business valuations. Our experts are trained and experienced in the litigation process. We have extensive experience in business valuations. Contact us to help determine what type of valuation you and your client might need. For more information, please call us at 210-340-8351.
Additional information included in this report was provided by PDI Global / Thomson Reuters © 2023