Dealmakers who are willing to separate the real estate from the sale of their business and conduct two separate deals often come out ahead, says Michael E. Gibbons, founder of Brown Gibbons Lang & Co.
“Generally a buyer wants the operating business,” Gibbons says. “They don’t always care about the real estate as long as they can control it and they can have the facility meet their needs. We’ve been able to optimize value to sellers by breaking that real estate off.”
In this edition of Dealmakers Live, Gibbons offers his insights into the opportunity presented by looking at two separate deals. What follows is a transcript of the above video, edited for readability.
Real estate as a separate deal
What we’ve been able to find is if you can parse that real estate, break it off into a separate transaction, as long as the buyer is willing to go along with that, generally a buyer wants the operating business. They don’t always care about the real estate as long as they can control it and they can have the facility meet their needs. We’ve been able to optimize value to sellers by breaking that real estate off.
What most people don’t realize is if you’re selling a business at 10 times EBITDA, that’s equivalent to a 10 cap in real estate. Ten times EBITDA is a very high multiple for a manufacturer, for instance. It would be right at the top of anything anybody’s ever gotten. Probably not achievable even in this marketplace. But if you translate that to the way people talk about real estate values, a ten cap is very cheap. Oftentimes we’re seeing real estate being sold to triple net funds at 6 ½ caps. That’s like 18 times earnings.
Unless you’re a tech company or a very high-growth company or a company that can command those kinds of margins because you have a lot of intellectual property and somebody is willing to pay those kinds of multiples to get what you know, you’re not going to achieve those kinds of multiples. If you’re a mundane metalworking company, getting seven times would be an extraordinary number. But that doesn’t mean you can’t sell your real estate for 18 times.
You can allocate those earnings that reflect the cost of the leasing of that real estate, and allocate that to the real estate, take it off your earnings, you’re not going to get that seven times multiple on that portion. But you may be able to go to the marketplace — you should examine this — and sell the real estate separately at 15 or 18 or 20 times. You should always examine that as an alternative. It’s something we do on every occasion with our clients. It has allowed us to get total proceeds to our client at a much higher level than we could without doing that. That’s our job.