Understanding what you are really buying: Avoid overpaying and doubling up on your property valuation along with the business valuation.
When buying a business in Australia, it is common to encounter situations where the business operates from a property owned by the seller. In some cases, the property is offered as part of the transaction, while in others it is retained by the seller and leased to the buyer. Understanding how to separate the value of the business from the value of the property is critical to making a sound acquisition decision.
Failing to properly distinguish between these two assets can lead to overpaying - effectively doubling up on the valuation of each separate asset. This can lead to financing challenges, as the bank clearly separates each value. It can also lead to unrealistic expectations about future performance. Business buyers who understand this separation are better positioned to negotiate fairly and structure deals that support long-term success.
A business and a property are fundamentally different assets, even when they are closely connected operationally. A business is typically valued based on its ability to generate cash flow, while property is valued based on market evidence such as location, zoning, condition, and comparable sales.
While the business may rely heavily on its premises, especially in retail, hospitality, or industrial sectors, this reliance does not automatically mean the property adds value to the business itself. Buyers must assess each asset independently before considering any combined benefits.
Most Australian businesses are valued using an earnings-based methodology, commonly a multiple of EBITDA or adjusted net profit. This valuation reflects the risk profile of the business, its sustainability, and its growth prospects. Read more about How valuation multiples vary by industry
Importantly, business valuations generally assume a market rent is being paid for the premises. If the current owner occupies their own building and charges no rent or below-market rent, this must be normalised to avoid overstating business profitability.
Commercial property is usually valued based on market sales evidence or capitalisation of market rent. Factors such as lease length, tenant quality, location, and redevelopment potential all influence value.
Even if the business is successful, the property may not necessarily be high value, and conversely, a valuable property does not guarantee a strong business. Treating them as separate investments allows buyers to assess risk more accurately.
In long established businesses, there can be a perceived overlap between the goodwill of the business and the property itself. Customers may associate the location with the brand, particularly if the business has operated from the same site for decades.
While this location-based goodwill has value, it still belongs to the business rather than the property. Buyers should be cautious not to double count this value by paying a premium for both the business goodwill and the real estate without clear justification.
One of the most common pitfalls for buyers is relying on financials that do not reflect a realistic rental expense. If the seller owns the property, the business may appear more profitable than it would be under a commercial lease.
Buyers should ensure that financial statements are adjusted to include a market rent. This creates a true picture of business performance and ensures the valuation reflects reality rather than ownership structure.
Rent normalisation is one of the most important adjustments a buyer must make when assessing a business that operates from premises owned by the seller or leased at below market rates. Failure to normalise rent can significantly overstate profits and lead to an inflated valuation.
This 5 step checklist is designed to help business buyers systematically assess whether rent has been properly accounted for and to ensure that earnings reflect realistic operating conditions after settlement.
Step One: Understand the Current Occupancy Arrangement
Step Two: Determine the True Market Rent
Step Three: Apply Rent Normalisation to Financials
Step Four: Assess Lease Risk Post Purchase
Step Five: Consider Strategic Alternatives
Purchasing the property alongside the business can provide strategic advantages. As the owner of both, you effectively become your own tenant, removing the risk of rent increases, lease non-renewals, or landlord disputes.
Owning the premises can also provide long-term capital growth, diversification of assets, and greater control over the operating environment. For some buyers, this stability justifies a higher overall investment.
While there are benefits, combining the purchase can also concentrate risk. If the business under-performs, the buyer may still be burdened with a large property loan and holding costs.
Buyers should also consider opportunity cost. Capital tied up in property could otherwise be used to grow the business, reduce debt, or acquire additional operations.
Some buyers choose to purchase the business only and secure a long-term lease in place with favourable terms. This approach preserves capital while still providing operational stability.
Others negotiate options to purchase the property in the future, allowing them to assess business performance before committing to real estate ownership.
Business loans and property loans are assessed differently by lenders. Separating the assets can make financing simpler and more transparent.
When buying both, buyers should work closely with lenders and advisers to ensure loan structures align with cash flow and risk tolerance.
Separating the value of a business from the value of its property is a critical skill for business buyers. While there can be strategic advantages to owning both, each asset must stand on its own merits.
Buyers who clearly understand what they are paying for, and why, are far more likely to acquire a business that delivers sustainable returns and long-term value.
