I'm looking at buying a small business and like to split the real estate and the business during the valuation process. For the real estate side buyer and seller agree that a triple net rent of $45k a year is a good starting point. - Long lease as it would be hard to refill. (10-20yr)
I don't want to be unreasonable on the valuation but in our small market (100,000 people) it would seem like a high cap rate makes sense. Industrial in Minneapolis and Chicago seems like 8% or so, by the time I adjust for location and uniqueness I\m in the 10 to 11% range. The difference between 10 and 11 is pretty high. Plus the limited rental options make 11 seem low a little. Just not sure.
Anyone with any experience with odd properties?
Hi @Steve Dye ,
I do not think you are being unfair here.. is this a single tenant property? Am I understanding correct that this would end up being owner occupied?
Business valuation = 3-4x NOI + inventory.
The two most important questions: (1) what is the financial strength of the tenant / what do their trends and industry viability look like? I'd assume this is pretty solid if you are willing to purchase the business and property all in one transaction. (2) the length of the initial lease is very important. 10 - 20 years is a very large range. A 20 year initial lease on a business that is growing in an industry that will only get bigger with a strong lease guaranty would have a significantly lower cap rate than a 10 year lease with a struggling company you're looking to turn around.
That being said... as I started: I don't believe you are being unfair. Start 11-12% and negotiate down so everyone feels like a winner.
Great Mike - Thanks!
The business is stable but not growing so my business valuation will probably be around the 2.5 to 3x NOI + inventory.
The industry outlook is decent and the store upside is decent as well. Not going to change the world but since I'm not betting the farm I am ok with a little risk. It has little extra land for storage units or pumpkin patch to bump revenue a bit. Think I will start at the 11-12 and see how it goes.
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