Our automated warehouse operations sit on highly valuable industrial real estate that we own outright, but the buyer is trying to bundle the real estate into a single EBITDA-based enterprise valuation. How do we use the Gross Substantial Value method to force a separate valuation for our physical holdings and maximize our total payout?

Question

Tyler Smith · Accepted Answer

If your operating business owns valuable real estate, allowing a buyer to bundle those physical assets into a generic EBITDA-based valuation multiple is a major mistake. Real estate and operating companies have completely different risk profiles, and valuing them together almost always results in leaving money on the table. To maximize your total payout, you must use the Gross Substantial Value method to value your physical holdings separately from your operating cash flow. This approach requires you to obtain an independent, fair-market appraisal of the real estate and any major machinery. Once you have established the market value of your real estate, restructure the relationship between the property and the operating business. Establish a triple-net lease agreement where the operating company pays a market-rate rent to a separate holding company that you retain post-close. This lease payment will reduce the operating business's EBITDA, which will lower its standalone valuation. However, you will recover this value and more by securing a long-term, predictable stream of rental income from the buyer. You can then sell the real estate separately to an institutional investor at a much lower capitalization rate than the operating business's multiple, or keep the property as a personal, cash-flowing asset for your post-exit life.