How is Real Estate Taken Into Consideration for A Business Valuation?
The business is valued under the assumption that it is paying a market level rent expense. If the actual rent payments are higher or lower than market, an adjustment to the earnings stream is required through the "one-time" boxes on the income statement. For example, if the business is paying rent to a related party that is $40K per annum BELOW market level, it is implicitly assumed that the hypothetical buyer will be required to pay a market rent - and an entry for $40K should be placed into the "one-time/non-operating revenue/gain" box. This will reduce the earnings stream by $40K to reflect the "true" cost of the real estate.
On the balance sheet side of the tool, it is best to remove the real property accounts (both assets and liabilities) if the business being valued directly owns the real estate. If you wish to value the business and the real estate with a single number, it is just a matter now of adding the current market value of the real estate less the current mortgage balance to the value of the business.
Value of Business + FMV of Real Estate - Current Mortgage Balance = Value of Business and Real Estate Together.
The more common situation involves one owner of two distinct operating entities (one for the business that is being valued and one to "hold" the real estate). The issue here involves making sure that a market rent burden is reflected in the earnings stream.