How much is a freehold or leasehold business worth?
When buying or selling a business, one of the main factors that determine the value of the business is property tenure, i.e., whether it is freehold or leasehold. If the business does not have any association with commercial property, this does not apply.
To read more about different tenure types, view our dedicated property tenure guide.
How freehold property impacts business value
Freehold property is completely and permanently owned by the business, and therefore, the business has full rights over the property. As the property is an asset owned by the business, it contributes to the value of the business.
The key factor here is ownership. As a property owner, you have the right to operate the property as you wish and amend it to suit your commercial interests. If the success of your business is contingent on the property, this influences the business valuation significantly.
For example, an upmarket clothing designer may require a high specification property in a prime location with unique characteristics to appropriately serve its client base. Whereas a butcher shop may require a purpose-built property equipped with a cold room, meat counter, and food preparation area to operate.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
How leasehold property impacts business value
Leasehold property is not owned by the business; lease payments are made in return for access to the property for a specified period. As there is no ownership element, the value of the property is not factored into the valuation of the business. However, the finer details of the lease, such as the lease duration, transfer terms, and restrictive covenants may influence the value of the business and the appeal to buyers.
When selling a business with leasehold property, you must provide the following information to help interested parties make an informed decision.
- Lease duration – How long is left on the commercial lease? Is there a break clause? Can the lease duration be reduced or extended?
- Lease payments - Is there room for negotiation? Is there a cap on rent increases?
- Restrictions – What restrictions should the new tenant be aware of?
- Transfer terms – Are there any rent adjustments? Is the security deposit protected? Has landlord permission been sought?
When transferring a lease upon selling a business, it’s essential to make the transfer legally binding and have written confirmation from the landlord of their approval. This protects you from any claims and separates you from the new tenant, should any issues arise in the future.
Freehold vs leasehold
The property element of a freehold business is likely to be worth more as ownership lies with the business. However, valuation aside, there is a strong appeal for both freehold and leasehold businesses.
Freehold businesses are often rich in value, while leasehold businesses offer a high degree of flexibility and low maintenance costs, which could be more efficient over the long term, depending on the type of business and trade. When a business buyer starts their search for a business, they must decide which route, freehold or leasehold, is right for them.
How can Selling My Business help?
If you are looking to sell a freehold or leasehold business, get in touch with a member of the Selling My Business team for expert advice. Our in-house valuation team can also offer a free valuation if you appoint our team to sell your business.
