Real Estate: The Albatross of Today's Virtual Business Model

In working with a recent client in the IT services market, he made a very poignant remark regarding the real estate owned by the business:

…this thing is like an albatross around our necks

Today’s virtual businesses represent an extremely different model from the companies of just a couple of decades ago. Most of today’s cash-cow companies require more brainpower and human capital than actual physical property. Moreover, many of today’s successful businesses were started with nothing more than a laptop in a coffee shop or a time-leased space in some type of virtual office.

This particular client had a couple of things going against him when it came to his real estate.

1. After the end of a good year with his business in 2008, he purchased his commercial building at the height of the market. Subsequently, his company’s cash flows significantly decreased with the market and so did the value of the property — a double-whammy which still has yet to completely recover.
2. He operates a virtual staffing company with most of his W-2 and contract employees residing at the client site most of the time. His 10,000 square foot office space sits empty about 99% of the time, except during a weekly meeting. That weekly meeting is a big cost at $15K per month — which is what his current mortgage payment totals on the place.
3. We were representing him in a sell-side engagement. None of the right business buyers wanted to touch the property and because the cash costs were on the P&L, we couldn’t, in good conscience, make the adjustments to the bottom-line in the assumption the business would be moved — so it had a natural drain on cash flows.

He informed me that he could get the very same utility out of a $5K monthly lease on a smaller, but large enough piece of real estate and operate much more cash efficiently. Not to knock commercial real estate — it certainly has its advantages, the main one being a tax shelter and a hopeful equity growth vehicle over time. It also provides leverage and, in some cases, a good cash yield, especially if you can co-locate with other companies.

The problem with our little example here is that it was too much for what they needed. The amount of interest they were paying, even after the tax advantages and low interest rates — and even the equity being built by their monthly payments — couldn’t compare to the returns they could have received elsewhere. Think of it. An extra $10K a month in cash flow is enough to hire a very good Enterprise salesperson to assist in the company’s growth.

If not that, then investing in other forms of advertising and marketing could also be a big boon long term. It could mean landing a couple more big accounts year-over-year to help establish the business as a growing force. If nothing more, a no-load indexed mutual fund with $10K going in might have better returns than the equity he’s building in his commercial property, especially since said equity still has yet to fully recover since 2008.

Oh, and did I mention they had to put over $200K into the building in remodeling? Not every situation will mirror this, but our treatment of commercial real estate in business can and should be treated like how we operate in cloud and virtual environments in computing: only pay for what you use and use the cash you save to plow back into the business. Sure, it’s only an efficiency innovation, but it beats the ole’ ball-and-chain of a commercial property.

How Real Estate Affects Business Valuation and Saleability

The case above illustrates a broader pattern: when commercial real estate is embedded in an operating business, it can complicate a sale in multiple ways. Prospective buyers of the operating business — especially financial buyers like private equity groups — typically do not want to acquire real property alongside the business. They are underwriting cash flow and growth potential, not real estate appreciation. Conversely, real estate investors are not paying operating-company multiples for a building.

This structural mismatch creates a valuation problem. If the building sits on the P&L as a fixed cost, it suppresses normalized EBITDA. If the seller tries to add it back as an adjustment, buyers will scrutinize whether the business can actually operate without that space and at what cost. Either way, the real estate introduces friction into the sell-side process that would not exist in a cleaner business structure.

The most common resolution is to separate the real estate before going to market — either by selling it outright, leasing it back to the business at market rate, or transferring it to a separate holding entity. Each approach has tax implications and operational considerations, and the right choice depends on the owner’s long-term goals. The article on what to do with business real estate when selling a company explores these options in detail.

Operating Efficiency and the True Cost of Underutilized Space

The client in our story was paying $15K per month for space used less than 1% of the time. But the full economic cost is even higher when you consider what that capital could have done deployed elsewhere in the business. In capital-allocation terms, every dollar tied up in underperforming real estate is a dollar not available for:

• Sales and marketing investment that drives revenue growth.
• Product development or service expansion that creates new revenue streams.
• Working capital that supports faster fulfillment and larger contracts.
• Talent acquisition — specifically, the kind of senior hires who generate multiples of their own cost in business value.

This opportunity cost framework is useful for any owner evaluating a major capital commitment. The question is not merely “can we afford this real estate?” but “what is the best possible use of these funds given the stage and strategy of our business?”

Strategic Alternatives to Ownership

Fortunately, the market for flexible commercial space has expanded considerably. Business owners who need professional environments for meetings, client visits, or periodic team gatherings have access to a range of options that did not exist a decade ago:

• Shared and co-working spaces — pay-per-use or monthly memberships that provide professional meeting rooms, private offices, and amenity packages at a fraction of ownership costs.
• Short-term or flexible leases — many landlords offer shorter-term arrangements, particularly in markets with available inventory, allowing businesses to scale space up or down as needed.
• Subleasing — if a business already owns or holds a long-term lease on more space than it needs, subleasing the excess to another tenant can convert a fixed cost into a partial revenue offset.
• Sale-leaseback transactions — owners can sell their building to a real estate investor and simultaneously sign a long-term lease as a tenant, monetizing the equity in the property while retaining use of the space.

Any of these paths can meaningfully improve cash flow and operational flexibility. For businesses preparing for a transaction, demonstrating a lean, asset-light operating model often results in a higher valuation multiple. When buyers see that overhead is variable and the business is not burdened by illiquid fixed assets, they underwrite less risk — and pay accordingly.

If you are evaluating how your real estate situation might affect a future sale or capital raise, consider reviewing your options with an advisor. You can also explore how similar considerations affect closely related industries in the article on selling your real estate services company, or speak with an advisor to discuss your specific circumstances.

Frequently Asked Questions

Should I sell my commercial building before selling my business?

In many cases, yes — or at minimum, you should separate the real estate from the operating company before initiating a sale process. Buyers of operating businesses generally do not want to acquire real property, and the presence of owned real estate can complicate valuation, financing, and deal structure. A sale-leaseback or a transfer to a separate holding entity are common pre-sale strategies.

Does owned real estate increase or decrease my business’s sale price?

It depends entirely on the market, the asset quality, and how the real estate is integrated into operations. In most cases for service, technology, and professional businesses, owned real estate does not add proportional value to the purchase price — and can actually suppress it by burdening the P&L with costs that buyers cannot underwrite at operating-company multiples.

What is a sale-leaseback, and is it right for my business?

A sale-leaseback is a transaction in which a business sells its owned real estate to an investor and simultaneously signs a long-term lease to remain as a tenant. This converts illiquid real estate equity into liquid capital that can be reinvested in the business, while preserving operational continuity. It is particularly attractive for businesses with valuable real estate and strong, predictable cash flows that support a long-term lease commitment.