Profits & Investment Method Flashcards
What is the definition of the Profits Method?
- ‘An assessment of the FMT for a particular business,
- being the level of trade that a REO would expect to achieve from all forms of income
- when running the business in a proper manner
- on the assumption that the property is property maintained, repaired and decorated.’
What is the basic premise of the Profits Method?
The value of the property depends on the profit generated from the business, not the properties physical location
What is the basic Profits Method calculation where accounts are provided?
= Turnover
- Less costs e.g. buying beer and supplies
= Gives Gross Profit
- Less Working Expenses e.g. staff costs
= Net Profit
- Less operators remuneration
= Gives FMOP
A ‘multiplier’ is then applied to give Market Value
Then ‘sense checked’ against comparable evidence
What are the steps to a Profits Method calculation?
- Assessment of the FMT that could be generated by a REO
- Assessment of potential gross profit resulting in FMT
- Assessment of FMOP.
- FMOP is capitalised against a ‘years purchase multiplier’ to give Market Value
What factors would effect a ‘Years Purchase Multiplier’? (Name 5)
- Tenure
- Location
- Existing Competition
- Historic Trading Performance
Where would the profits method apply?
Where the value of the property depends on the profitability of its business and trading potential
What assumptions would you have for a Profits method approach?
That the property is…
1. Equipped
2. Repaired
3. Maintained
4. Decorated
What is FMOP and what factors would effect FMOP?
Fair Maintainable Operating Profit
Factors:
1. Age
2. Location
3. Trading Style
4. Accommodation (letting rooms)
What would the role of an Auditor be?
Within a valuation an auditor would review and challenge accounting evidence used in valuations
What are the different types of accounts used within valuations?
Which would you give greater weight to?
- Management Accounts
2, Audited accounts
I would attach greater weight to audited accounts as they have been verified
When would you take an Investment Method approach?
When their is an ‘income stream’ to be valued
What is the basic premises of the Investment Method?
‘This approach applies a net initial yield to the passing rent (if
appropriate) to arrive at a Market Value after deducting standard purchaser’s costs’
What are the 3 main Investment Valuation Methods?
- ‘Conventional Method’
- ‘Term & Reversion Method’
- ‘Hardcore Method’
Within an Investment Valuation what is the basic premises of the ‘Conventional Method’?
Applying a Yield to the Passing Rent to give a Capital Value
Where would you apply a Term & Reversion approach?
When the rent passing is assessed to be below Market Rent
Within an Investment Valuation what is the basic premises of the ‘Term & Reversion Method’ is calcualted?
- The passing rent is capitalised at a yield until the next lease event giving the ‘Term Value’
- The rent then reverts to Market Rent which is capitalised into perpetuity to give ‘Reversionary Value’
Within an Investment Valuation what is the basic premises of the ‘Hardcore Method’ is calcualted?
- An Income Flow is divided horizontally
- The ‘Top Slice’ is capitalsied at a higher yield to reflect the additional risk until the next lease event
- The ‘Bottom Slice’ is then capitalised into perpituity
How would you best describe ‘trading potential’?
Future profit an REO could expect to generate from the property
You’re valuing a pub as a fully equipped operational entity. The seller insists their profits are “exceptional due to loyal regulars.” The accounts do show unusually high turnover.
How should you treat this in the valuation?
Reflect the trading potential achievable by a reasonably efficient operator, excluding personal goodwill
