Real estate ownership and closely-held firm value
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Abstract
Purpose: We measure the value of leasing, versus owning, business locations for the closely- held firm. Design/methodology/approach: We examine the sales transactions of small businesses in the United States - those with revenues of less than $20 million per year - between 1995 and 2010. We contrast the values of firms that own, and do not own, their real estate. Findings: In general, we find negative relationships between closely-held firm values and real estate ownership. Nowhere did we observe firm value being enhanced by property ownership. Research limitations/implications: Our 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: Our findings are important to the small-business broker and the investor. The broker might better advise the buyer and seller with our 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. Social implications: Government support of new businesses recognizes that real estate ownership is not necessarily a centerpiece of business success. This study re-emphasizes that premise. Originality: 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 our attention in this study.
