We own the commercial real estate our company operates out of and charge ourselves above-market rent while sharing administrative staff with a sister entity. How do we unwind these related-party entanglements before financial diligence begins?

Question

Tyler Smith · Accepted Answer

Commingling assets, sister-entity payroll, and above-market lease rates may make sense for tax planning, but they create massive friction during institutional diligence. Buyers and their Quality of Earnings teams treat related-party entanglements as red flags that distort your true adjusted EBITDA.

You must normalize these relationships at least twenty-four to thirty-six months before going to market.

First, address the real estate lease. Commission an independent commercial real estate broker to run a formal fair-market rent analysis for your property. Restructure the lease agreement between your real estate holding entity and your operating company to match arms-length market rates exactly. Sign a formal triple-net lease with standard commercial terms. If you intend to sell the real estate with the business, that is one transaction. If you plan to retain the building as a long-term income stream, your operating company must demonstrate historical financials based on realistic market rent.

Second, sever all shared administrative staff and intercompany service allocations. If your operating company shares a bookkeeper, HR director, or software licenses with a sister business, establish separate vendor accounts and split payroll cleanly. Eliminate management fee allocations that shift cash between entities. Every person supporting your operating company must sit on your operating company payroll and occupy a clear seat on your Accountability Chart.

Third, let these normalized financials run clean for at least two full fiscal cycles. When buyers audit your trailing twelve months of historical earnings, they want to see clean, auditable operational overhead that requires zero subjective adjustments. Unwinding related-party entanglements early eliminates buyer skepticism and preserves your valuation multiple.