Evaluation Real Estate within Acquisition

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by a searcher
in Berlin, Germany

2yrs ago

Evaluation Real Estate within Acquisition

Dear Searchers,

I am performing a self funded search in Germany and meanwhile came across several deals where the real estate is part of the transaction. However, in all the cases so far, the owners seem to evaluate the associated property way higher than I do. Those are commercial properties that are necessary to run the business and closely attached to the business itself. I am therefore applying a valuation that combines real estate and business, and apply a discount on the property evaluation to the standalone market price. This is mainly based on assuming that the business cannot be easily transferred to another location, while the overall return for the seller of selling company + real estate will always be higher rather than closing the business and just selling the real estate.

It seems however that owners are still sticking to their high price expectations because a Real Estate Agent told them their property would sell xyz. I start to believe that there is a major downside in businesses that own the real estate and would be really interested how you guys evaluate and calculate those kinds of deals?

Thanks in advance! Cheers,
Jonas

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reply by a searcher 2yrs ago
in New York, NY, USA

I found it useful to take the seller through a proceeds illustration. As you point out, they cannot sell the business without the real estate attached (either via sale or long-term lease), so the way they maximize total proceeds is likely to accept a slight discount on the CRE.

Also may be worth exploring a sale leaseback so you can acquire the real estate without having to raise additional capital. Note that depending on historical rents, there would likely have to be an adjustment to go-forward rents (simple cap rate calc; SLB investors would expect 7-9% of property value for annual rent).

It is also worth looking into your optionality to move the business into a new space. If the sellers are stubborn on the real estate piece (large bid/ask spread), and you could get comfortable with the business disruption risk, this is potentially the only solution. Though this depends how keen your are on the business, as moving on may be the best option.

reply by a searcher 2yrs ago
in Berlin, Germany

Thank you very helpful! Unfortunately, moving is too expensive and those owners do want to sell their real estate. Which I find even more counterintuitive considering they are calculating with the standalone RE valuation but are not willing to sell int separately.