If the business owns the real estate, you would need to pay for the real estate separately. In other words, if you paid 3-5x EBITDA for the business, you would then need to acquire the real estate on top of that price. This is why many buyers do not like when the real estate is owned, and the deal can fall a part for this reason - after all, the buyer's backers committed capital to the fund to invest in a business, not to invest in real estate.

If you don't want the real estate but still want the business, your best bet is to discuss with the seller to see if they'd be interested in selling the real estate separately. Alternatively, I've been involved in deals where we hired a broker to find a buyer for the real estate and performed a sale-leaseback, thus only having to own the real estate temporarily. It's messy, but if you really want that business then it is doable.

Great question and great points raised in previous comment. I analyze the Real Estate while calculating EBITDA (if using that as basis for business value). I'd like to see if owner rent expense is fair market and adjust accordingly (quite often owners accounting practices might have them inflate rent to themselves or expense below market rent in leaner years).

This adjustment will allow a more accurate basis for EBITDA & resulting business value. This will then allow you/investors to determine value of the real estate and make decisions on whether to purchase, exclude from sales and rent, or look for alternative options.

You can usually get debt providers to think about the debt in two tranches too: the mortgage on the property and term loan for trading business.

ok, thanks a lot - this clears the subject.

Consider doing a sale-leaseback and burden EBITDA by market-rates for rent / operating leases. A small business should have much better growth potential the commercial real estate (which is more stable but lacks the upside, even with leverage). If you have a hurdle or preferred return for outside investors, you don't want a larger purchase price - because you included buildings/land/non-operational equipment - and a significant chunk of less productive assets to limit your ability to out perform the preferred. And even if you are the only equity holder, differentiate CRE investing from SMB investing.

Just to add, be aware that depending on the geographic region the company operates in, you can obtain a 100% mortgage for the real estate if you are operating the business in the acquired space. I've seen some people miss out on this opportunity, which changes the economics at times between buying the property or leasing it from the previous owner

I know that in some deals searchers bough a business + its land and then immediately mortgaged the land. I know some that in some tuck-in acquisitions the guys that did a roll-up of QSR in the US made more money from the mortgage than the money they paid for the business.
E.G. they bought a business for $1M (operations of a particular site + land) and managed to mortgage the land for more than $1M.

Though more often, you just buy the business and sign a very long lease contract (10+ years) with the seller for the land. You obviously decrease (adjust down) EBITDA for the lease payment.

Typically if the real property is owned by the target business and there is no lease/rent expense recorded in the financials, the real property is included in the deal just like any other fixed asset. If the real estate is held in a separate company, where the target business is paying market lease rates, the real property is valued and sold separately, should the buyer seek to own the property. Often in that case the buyer will lease the premises with a first right of refusal to purchase at a later date.

Agree with Neil. You are either including that asset in price or you are adjusting EBITDA for market rent. Paying less for the biz and buying building. 6 in one hand half dozen in another. Either way you have accounted for your facilities expense.

I would add, consider acquiring the premises as a matter of collateral for the acquiring of the going concern. It helps when attracting acquisition financing and gives your investor(s) a collateralized object in case the business does not perform.

Agree with Neil's and others' comments. And am wondering about the statement that "the idea is not to pay anything for the machines that produce the EBITDA." If the value of the company derives from the assets generating the cashflow stream you're acquiring, how would you get those assets (in this case machines apparently) "for free" or exclude them from the transaction? Not trying to be adversarial here, just looking to help clear up possible misconceptions about valuation.