Question on Buying Business with Real Estate

1 Reply

I've seen that when buying rentals you use a cap rate. Cap rates of 6-12% seem to float around.

Then, as far as buying a business, it is common to buy in multiples of earnings, ie. 2x-5x earnings, or more or less depending on the industry.

Now, I was once looking to buy a convenience store (franchise) and it seemed as if I'd be buying around 2.5 times earnings, so higher than a 6-12% cap rate, but obviously that makes sense because it is much more work than a semi-passive apartment complex with a manager, or something along those lines. No land was going to be purchased, just the business.

OK, but here is my real question: Is there a formula of sorts for when you are buying a business that also comes with the land? We can use the same example, maybe a convenience store/gas station with the land included in the purchase? Thanks for any replies.

The land and building is one value and the business is another.

Typical deal is to try and buy the business at 2X profit but seller usually wants 3. SBA loans are harder to get so buyer generally offers 40 to 50% down and ask the seller to carryback a loan for the difference when buying at a 2 times multiple value.

Most businesses are owner operators meaning you are buying yourself a job. For instance they say the business profits 50k. You look in books and they pay themselves as manager for working a trillion hours a week. Take yourself out of that equation and pay a manager 30k to 40k a year and your profit is almost zero now.

If you don't want to buy yourself a job then larger businesses are purchased where assistant manager and manager are in place and it still profits high numbers. How the building and land are value depends on a bunch of factors and lease type.

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