In my practice brokering commercial real estate and businesses, I encounter situations where sellers wish to package their real estate with a struggling business, inflating the asking price beyond the property’s fair market value as they assign value to the operating business. A recent example illustrates this:
A seller was offering both their property and business as a package deal, asking a premium above what the real estate alone was worth. On paper, the business had several years of essentially zero reported income, yet the seller hinted that revenue was simply unreported. That, by itself, is of course difficult.
Doing a back-of-the-napkin analysis, estimating revenue, cost of goods sold (COGS), and operating expenses, the numbers seemed to show some level of profitability—but only before considering rent. Once fair market rent was factored in, the business would actually be operating at a loss.
This scenario raises fundamental issues about how business value is perceived versus how it should actually be evaluated. Here’s why this kind of situation often results in a business being either worthless, needing relocation, or being mismanaged.
The Common Valuation Trap
Sellers in these scenarios often make the mistake of double-counting value by assuming:
- The real estate is worth full market value.
- The business adds additional value on top of that.
The problem? If the business cannot afford to pay market rent for the space, it is not a true income-generating asset—it is either an underperforming operation, an owner-subsidized venture, or simply a liability. A business with no real profits (after rent) cannot justify a premium above real estate value.
Three Key Takeaways for Buyers
1. If the Business Cannot Pay Market Rent, It’s Effectively Worthless
Any business needs to be able to sustain market-rate expenses, including rent. If it can only survive because the owner is undercharging themselves for rent, it does not have transferable value to a new owner. In cases like this, a buyer should view the business as an optional add-on at best—not as something worth paying extra for. With some small businesses, buyers are not doing much more than buying themselves jobs. This is worse than that. Many small business owners are in this situation, unaware.
2. The Business May Need a New Location
If the numbers show that the business model works but only at a lower rent, the issue isn’t necessarily the business itself—it’s the location. A business that needs artificially low rent to survive should be relocated to a more cost-effective property rather than forcing a buyer to overpay for an unsustainable setup. Evaluating this, however, involves estimating any effects on revenue, personnel, etc., for a relocation, in addition to lease up costs for the property.
3. Mismanagement Could Be the Real Problem
If a better operator could restructure expenses, increase revenue, or streamline operations, there may be an opportunity to turn things around. But that requires serious due diligence. If the only way to justify the purchase price is by assuming operational changes that haven’t yet been made, the buyer is taking on risk without a guarantee of success. Within this general “mismanagement” category is pricing. Often owners have felt reluctant to increase prices, sometimes for many years. That’s an easy fix except for that adds an unknown effect on revenues.
Navigating These Deals as a Buyer
When faced with a seller overvaluing a struggling business, consider these negotiation strategies:
- Challenge Their Valuation – Point out that if the business cannot sustain market rent, it has no real value. Ask for proof of profitability, not just revenue estimates.
- Separate the Real Estate from the Business – If the real estate is desirable, make an offer for it alone and leave the business out of the equation.
- Propose Seller Financing – If the seller insists the business has value, structure a deal where they finance the business portion, with payments contingent on meeting profit benchmarks. If they truly believe the business is profitable, they should be willing to bet on it.
The Bottom Line
Many small business owners believe their business adds value to their property, but if the business cannot generate sustainable, verifiable profits after paying market rent, it is either:
- Worthless as an acquisition,
- Better off moved elsewhere, or
- Mismanaged and in need of a turnaround.
For buyers, the key is to separate real estate value from business value and ensure that any premium is justified by real, provable income—not just a seller’s assumption. I’ll add to this that one should not waste much time on such an acquisition. Seller’s identities are frequently wrapped up in their businesses. Suggesting that the business is worthless can be like talking to a wall. In these situations, walk away, leaving a standing offer, perhaps following up every three months to confirm continued interest. As a broker, that is what I do.