Valuation - Profits Method

Question 1

What is the purpose of the Profits Method-of Valuation?

Answer 1

Used for valuations of trade related property where there is a ‘monopoly position’

This method is used where the value of the property depends upon the profitability of its business and its trading potential.

Question 2

What types of properties is the Profits Method-of Valuation used for?

Answer 2

Pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure and healthcare properties, and care homes

This method is used for various types of properties where the value depends on the profit generated from the business.

Question 3

What is the basic principle of the Profits Method-of Valuation?

Answer 3

The value of the property depends on the profit generated from the business, not the physical building or location

Accurate and audited accounts are required for 3 years if possible.

Question 4

What is the Simple Methodology of the Profits Method-of Valuation?

Answer 4

Annual turnover - costs/purchases = Gross profit
Less reasonable working expenses = Unadjusted net profit
Less operator’s remuneration = Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)

This method involves calculating the profit generated by the business to determine the value of the property.

Question 5

How is the Adjusted net profit expressed?

Answer 5

As the EBITDA (earnings before interest, taxation, depreciation, and amortisation)

EBITDA is a common financial metric used to evaluate a company’s operating performance.

Question 6

What is the final step in the Profits Method-of Valuation?

Answer 6

Capitalised at appropriate yield (years purchase multiplier) to achieve market value
Cross check with comparable sales evidence if possible

The final step involves applying a yield to the adjusted net profit to determine the market value of the property.