Permanent Podcast: Real Talk About Private Equity and Buying, Selling, and Operating Small Businesses
Financial Structures: Real Estate & Cap Rates (EP.24)
Sep 23, 2019
This podcast delves into the importance of real estate in business transactions, exploring lease negotiation, fair market value appraisal, and cap rates for investments. It also highlights real estate as a tool for enabling business returns rather than a standalone investment.
06:08
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Quick takeaways
- Understanding the impact of real estate on a business's valuation and negotiating lease terms are crucial when selling a business that owns real estate.
- Investors in private companies prioritize the operations of the business over the value of the real estate, considering it as a tool to enhance returns rather than a primary investment.
Deep dives
The Importance of Understanding the Interplay between Real Estate and Operating Companies
When selling a business that owns real estate, it is crucial to understand how the real estate impacts the company's valuation. While some buyers may be interested in purchasing the real estate along with the business, most will negotiate a lease. The seller will generally seek a long-term triple net lease with a favorable cap rate, while the buyer will prefer a low-cost short-term lease with options to renew and rent escalation. The flexibility of the real estate can provide the seller with more negotiation leverage. A fair market value appraisal is a good starting point for determining the value of the real estate, but it is important to consider the common cap rates for real estate investments in order to accurately assess its worth.
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