AboutMike Fortunato Expertise Can answer questions on all aspects of commercial real estate management, including lease administration, eviction issues, financial reporting and budgeting, asset valuation/enhancement, marketing & leasing, and site maintenance and repairs. 20+ years of real estate management.
Experience 20+ years in commercial management. Current own and operate property management company in southern California.
Question We are considering the purchase of an on-going business located on leased land with 22 years left on the lease.
If we keep the business 22 years how do we calculate the value of the business today? Or if we keep it 5 years, how do we calculate the depreciation in order to price for sale?
For example, excluding rent increases, revenue increases, etc., do we simply say (net income before taxes)-(cost of business/22)=(real income), and then decide if the ROI is satisfactory? That means that after 5 years, we would sell it for (our purchase price)*(1-5/22).
Does that sense, or is there an easier way?
Answer Unfortunately, I probably won't be of much help on valuating a business venture, as it is somewhat different than making a valuation on investment real estate. I think it would be best to ask a business broker that question, as they have formulas they use for that specific analysis. I will say, however, that your approach seems sound since net cash flow is probably your main concern when it comes to deciding on a business. The leased land component should simply be treated as an operating expense.
