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 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) 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 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.
