Real estate ownership and closely-held firm value

Abstract

Purpose– The authors aim to measure the value of leasing, versus owning, business locations for the closely-held firm.Design/methodology/approach– The authors examine the sales transactions of small businesses in the USA – those with revenues of less than $20 million per year – between 1995 and 2010. The authors contrast the values of firms that own, and do not own, their real estate.Findings– In general, the authors find negative relationships between closely-held firm values and real estate ownership. Nowhere did the authors observe firm value being enhanced by property ownership.Research limitations/implications– The data set may be limited by the accuracy of the data provided by business brokers. Compared to the capital markets, the small business “exchange” is less efficient, but it is the only source of unlisted business sales data.Practical implications– The findings are important to the small-business broker and the investor. The broker might better advise the buyer and seller with the findings. Business owners, private equity investors, and their advisors, are all reminded to focus on the core business strategy and avoid getting “locked into” real estate ownership in a business investment.Originality/value– The impact of real estate on the valuations of closely-held firms is a largely unexamined area. And there is a lack of consistency on publicly-held company valuations as a function of real estate ownership; these public company findings and the dearth of work on the privately-held company's real estate attract the attention in this study.