How do you calculate in the premises?

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February 18, 2021

by a searcher from Helsinki University of Technology in Helsinki, Suomi

if the basic rule is to pay 3-5 X EBITDA, how does this take into account the premises? Are they included in this price or not? Or do you calculate those on top of the price? This is currently very confusing to me. The idea is not to pay anything for the machines that produce the EBITDA, but what about the premises and the land? Any ideas?

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Reply by a searcher
from Ivey Business School at Western University in Toronto, ON, Canada
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.
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Reply by a lender
from Indiana University of Pennsylvania in Pittsburgh, PA, USA
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.
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