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 typically looking to acquire cash-generating operating businesses, not physical real estate assets.

If you bundle the real estate with the operating company:

• The buyer will often apply an operating multiple to your EBITDA, but they may fail to pay you the full market value for the real property.
• Alternatively, they might overvalue the real estate and undervalue the operating business.

Maximizing Value Through Separation

By separating the real estate into a holding company, you effectively create two distinct sources of value:

• Operating Company Value: You can sell the operating company based on a high multiple of its normalized EBITDA.
• Real Estate Value: As part of the transaction, you negotiate a long-term, triple-net lease with the buyer's new operating company. This arrangement offers you a steady, passive income stream post-sale, while allowing you to retain ownership of a valuable hard asset. This strategy can significantly increase your overall [business valuation](/qa/what-moves-business-valuation-multiples) and provides a predictable revenue stream.

Due Diligence and Transparency

To ensure this structure is effective during due diligence, it's crucial to adjust your historical income statements. Your Quality of Earnings (QoE) report must reflect a fair market rent expense. This allows the buyer to see an accurate, normalized EBITDA for the operating business.

This transparency is vital for several reasons:

• It builds trust with potential buyers.
• It prevents buyers from claiming that your margins are artificially inflated due to an artificially low, non-market rent expense.
• Proper financial clean-up is a key step to [avoiding founder burnout during exit planning](/qa/avoiding-founder-burnout-during-exit-planning) and ensuring a smooth deal.

Carefully assessing [operational risks before buyer due diligence](/qa/identifying-operational-risks-before-buyer-due-diligence) is also important to address any potential red flags.

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