Valuing a business that owns its premises

Freehold ownership is the most frequently mishandled item in an SME valuation. Owners add the property to a profit multiple and arrive at a figure no buyer recognises. The correct treatment is simple, but it has to be done in the right order.

The order of operations

Normalise the trading profit, then deduct a notional market rent for the space occupied.
Apply the earnings multiple to that rent-adjusted profit. That is the trade value.
Value the freehold separately at market value, net of any charge or mortgage.
Add the two. State both clearly, so a buyer can price either or both.

A worked example. Normalised EBITDA of £220,000 with no rent charged. Market rent for the unit is £45,000, so rent-adjusted profit is £175,000. At 4x, trade value is £700,000. The freehold is worth £600,000. The whole is £1.3m — not the £1.48m you would get by multiplying the unadjusted profit and adding the building on top.

Sell it, or keep it and let it?

Retaining the freehold and granting the buyer a lease is common and often sensible: it produces a retirement income and lowers the price the buyer has to fund, which widens your buyer pool considerably. The trade-off is that the lease terms — length, rent, repairing obligations, break clauses and any security of tenure — become part of what is being valued. A short lease at an above-market rent will reduce the trade value by more than the extra rent is worth.

Trade-related property is different

Pubs, hotels, holiday parks, care homes, garages, nurseries and petrol stations are usually valued as a single operating entity on fair maintainable trade, because the building has limited value without the business and vice versa. Two things follow. First, the multiple already reflects the property, so no rent deduction is applied. Second, the valuation has a floor: the alternative-use value of the site. That floor is why a struggling pub or a marginal care home can still be worth a substantial sum.

Non-trading assets and pension-held property

Surplus land, a vacant unit, a flat above the premises or a property held outside the trading company are all handled outside the earnings valuation and added — or excluded — explicitly. Where premises sit in a SIPP or SSAS, the trading company is normally paying a rent already, so the profit needs no adjustment, but the property is not part of what is being sold and must be stated separately along with the lease terms the buyer inherits.

Tax on separating property from a trade is fact-specific and can be significant. Get the valuation right first, then take advice from your accountant on structure — see also HMRC and tax valuations.

Common questions

How do you value a business that owns its own premises?

Value the trade and the property separately, then add them. Charge the trading business a notional market rent so its profit reflects what an occupier would really earn, apply the earnings multiple to that rent-adjusted profit, and add the market value of the freehold as a separate asset. Adding a property to a profit figure that pays no rent double-counts the benefit of ownership.

Why does a notional rent have to be charged?

Because an owner-occupier's accounts show no rent, which flatters profit. A buyer who takes on the trade but not the freehold would pay rent; a buyer who takes both is giving up the rental income they could otherwise earn. Deducting a market rent — evidenced from local lettings — puts the profit on a comparable footing with rented competitors.

Should the property be sold with the business?

It depends on the buyer pool. Selling both widens the price but narrows the field to buyers who can fund property. Many owners retain the freehold, grant a lease at a market rent on commercial terms, and keep an income stream — which is often the better outcome for retirement planning. The lease terms then become part of what a buyer is pricing.

What is a bricks-and-mortar valuation?

For trade-related property such as pubs, hotels, care homes, garages and holiday parks, the property and the business are commonly valued together as a single operating entity based on fair maintainable trade. Where earnings are weak, the figure floors at the value of the property in an alternative use — which is why some loss-making trading businesses are still worth substantial money.

Does an empty or under-used property add value?

Only at its market value less the costs of realising it, and only if it can be separated from the trade. Surplus land, a vacant unit or a residential flat above the shop are treated as non-trading assets, valued independently and added after the earnings valuation, with any tax on extraction flagged for your accountant.

The Business Valuers provides independent, fixed-fee valuations for UK SMEs. This article is general guidance, not tax or legal advice.