We own the real estate our business operates out of. Should we keep the property in the operating company during the sale or carve it out into a separate lease agreement to maximize valuation?

Question

Tyler Smith · Accepted Answer

You should almost always carve the real estate out of the operating business prior to the sale. Buyers are looking to buy cash-generating operating businesses, not physical real estate. If you bundle them, the buyer will use an operating multiple on your EBITDA but will fail to pay you full market value for the real property, or vice versa.

By separating the real estate into a holding company, you create two distinct sources of value. You sell the operating company based on a high multiple of its normalized EBITDA. As part of the transaction, you negotiate a long-term, triple-net lease with the buyer's new operating company. This guarantees you a steady, passive income stream post-sale while allowing you to retain ownership of a valuable hard asset.

To make this work during due diligence, you must adjust your historical income statements. Your Quality of Earnings report must reflect a fair market rent expense so the buyer sees an accurate, normalized EBITDA. This transparency builds trust and prevents the buyer from claiming your margins are artificially inflated by artificially low rent.