When businesses are valued, the real estate is usually appraised separately by a real estate appraiser and then that value is used by the business appraiser in arriving at a value for the company. Most business appraisers are not qualified or licensed to appraise real estate.
The value of an operating business includes the assets used in its operations to generate revenue and profits. Real estate is usually considered separately from the operating business because investors have different return expectations for real estate, which is considered a less risky investment than ownership in a business enterprise.
In South Florida the cap rates for real estate are currently just over 7% according to a recent article in the South Florida Business Journal. In contrast the rates for closely held businesses are much higher and can be well over 15% depending upon the business industry, the history and the future expectations for a company.
If the real estate were not segregated from the operating business in the valuation process, the real estate would be undervalued. Businesses are generally riskier than owning real estate, so investors require higher returns. The higher the rate, the lower the value. Generally, real estate that generated $1,000 of cash flow would be worth more than a business that generated $1,000 of cash flow.
When valuing a business, you may want to check with the business appraiser so that you can properly budget for any real estate appraisals that may be necessary as part of the valuation process.
© 2009 Florida Business Valuation Group
