Our Approach to Business and Property Valuation

This month we have decided to explain the process of business and property valuations one of our main focuses here at JS Reakes.

A business valuation is the process and set of procedures used to estimate the economic value of an owner’s interest in a business. There are three approaches to determining this:

• A cost approach This approach determines the economic value of a business by estimating the money required to build or replace the business. This might include a business in the first few years of trading where a clear profit margin has yet to be realised.
• A market approach (relative value) The Market approach consists of using a combination of comparable and precedent public company transactions. For example, many large business sales are in the public domain with public access to the data.
• The discounted cash flow/intrinsic approach Using the intrinsic or discounted cash approach requires a forecast of the potential future cash flow of the business to determine its economic value.

The varying methods for business valuations can be employed for different scenarios when different types or amounts of information are available. For example, where there is a lot of transactional data available on the sale of listed companies on the stock exchange the Market Approach is the easiest and most accurate. Where there is little or no evidence a more cautious approach is recommended.

There are additional factors to take into account when valuing a business such as finding the correct multiplier for net profit, which costs and revenue to include into a cost approach, the impact of location as well as freehold/leasehold status and many more.

Property valuations take the physical location of a business into account to determine its worth.

This is separate from a business valuation one dealing with the physical presence and one with the business’s success. A property valuation will include location and as much sales data and analysis of comparable properties as is available. The process of developing an opinion or value of property will include:

• A physical inspection of the property
• Measurements of the internal and external property
• Analysis of comparable local transactions
• Lease and title information

When do you need a valuation? 

You might need a property or business valuation if you are looking at exiting your business, just getting insight into value or to help settle a dispute. We suggest that consultation starts at least a few months before putting up a business for sale or taking action upon an exit strategy. For more information on determining the value of your business here is a link to our article on How much is your business worth?

A valuation can be provided for a range of people and scenarios. For example we provide valuation reports for Business owners, or professional advisors that need specialist advice:

• To help with making a strategic decision
• When considering a potential sale
• For current business or property interests before moving ahead with your plans.
• Unlocking the value within your business or property.
• A share valuation of your business
• Residential Homebuyer Level 2 reports and help to buy reports

What goes into a valuation report? 

In a typical valuation report you can expect the following information:

• A reasoned and researched valuation of your business and property by a professional valuer
• Detail regarding the current marketplace
• Comparable evidence to support the valuation
• Professional standards set out in the Red Book

A report can take up to 10 days from the date of inspection depending on the requirements of the owner and of the property/business.

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If you need any advice Contact us.