The buy-side QofE firm is arguing that our historical EBITDA should be adjusted downward because our lease rate is below fair market value since we own the real estate. How do we negotiate a fair rent replacement adjustment without destroying our valuation?

Question

Tyler Smith · Accepted Answer

When you own both the operating business and the real estate, buyers will always scrutinize the rent. If your business was paying below-market rent, the Quality of Earnings auditor will rightfully propose a negative EBITDA adjustment to reflect what a third-party tenant would pay. However, you do not have to accept their arbitrary market rate estimate.

You must control the narrative by getting an independent, commercial real estate appraisal before you go to market. Do not let the buy-side auditor use generic regional averages. Present a localized, professional appraisal that proves the fair market rent for your specific facility and zoning.

Once you have the data, negotiate the adjustment based on a triple-net lease structure. If the auditor wants to increase the rent expense on your historical books, ensure they also remove all property-related expenses that the business previously paid directly, such as property taxes, building insurance, and major maintenance. These expenses must be added back to EBITDA if they are now being wrapped into a higher rent figure.

Furthermore, tie the final rent adjustment directly to the lease agreement you sign with the buyer at close. If they insist on a high rent adjustment that reduces your business valuation, they must commit to paying that exact high rent rate under a long-term, ten-year lease. This shifts value from the business multiple to a secure, long-term real estate income stream.