Our operating company leases its warehouse and headquarters from a separate real estate entity that I personally own at a below-market rate. How do buyers evaluate related-party facility leases during financial diligence, and how do we normalize the lease before going to market?

Related-party real estate transactions are prime targets for financial diligence teams. If you charge your operating company below-market rent to inflate operating margins, a buyer will immediately adjust your EBITDA downward to reflect fair market rent. Conversely, if you extract cash through above-market rent, the buyer will demand a significant working capital and valuation adjustment.

Normalize your real estate relationship two to three years before you go to market through a disciplined, arms-length process:

- Commission an independent commercial real estate broker to complete a formal market rent analysis for your geography and asset class.
- Draft a formal, institutional triple-net lease agreement between your real estate LLC and the operating business, reflecting verified market rates.
- Establish standard commercial terms, including industry-standard lease lengths, tenant improvement allowances, renewal options, and clear maintenance obligations.
- Ensure the lease allows for standard assignment clauses so a buyer can step into the operating company lease without reopening real estate negotiations.

Decide well in advance whether you intend to retain the real estate as a passive post-exit cash flow asset or package the property as part of the total sale. Institutional buyers prefer clarity. When your facility lease is documented at arm's length with verified market benchmarks, diligence teams verify the number and move on without attacking your baseline earnings.

Category: Exit Planning