Finding data for comps is difficult when you’re valuing a real estate-centered enterprise (RECE), that is, a firm that also owns its real estate, such as a restaurant, nursing home, hotel, and the like. A convenience store is especially challenging, according to Franz Ross (First Niagara Bank), one of few appraisers credentialed in both real estate and business valuation.
One source: “Pratt’s Stats is an excellent source for this property type (and others) since none of the well-known real estate data sources publishes these data,” says Ross. “But the jewels in Pratt’s Stats are the comps where the real estate is known to have been acquired along with the business assets,” he says. In the “Asset Data” section, if the deal is checked to be a purchase price allocation and there’s a figure on the real estate line, that dollar figure is the allocated value of the real estate.
Most Pratt’s Stats transactions do not include real estate since usually only the business assets are acquired. But, even for these transactions, “Pratt’s Stats is an excellent source for adopting a capitalization rate for the equipment and the intangible assets acquired,” he says. Segmenting of EBITDA and cap rates by asset type is central to the excess earnings method (EEM) that Ross advocates for this type of assignment.
Adjustments needed: For the transactions with real estate included, you’ll have to make some adjustments. For example, you need to add the real estate price to the published MVIC price to get the total price of the RECE, advises Ross. “Also, if there was a rent (perhaps there is a related real estate holding company), the rent should be added back to EBITDA to create EBITDAR.” He also notes that other adjustments may need to be made to arrive at EBITDAR, such as for owner’s compensation.
Ross has developed a method for allocating total going-concern value into its components, including real estate, intangibles, and personal property. His model, known as the total excess earnings model (TEEM), is similar to other EEM models, except that it clearly shows where each value, income component, and cap rate were derived. He explains this and goes through an example in the September issue of Business Valuation Update. You can also read more about this method and the interaction between real property value and business value for going concern properties in BVR’s new special report, Valuing Companies with Real Estate: Appraisal Experts Untangle the Issues.