Valuation - Profits Method of Valuation

Question 1

When is the Profit Method of Valuation commonly used ?

Answer 1

It’s commonly used for valuations of trade related properties. Used where the value of the property depends on the profitability of the business and it’s trading potential.

Question 2

Provide examples of types of properties that would be valued using this method of valuation ?

Answer 2

Pubs, petrol stations, hotels, guest houses, nurseries.

Question 3

What is the basic principle for using the profits method of valuation ?

Answer 3

The basic principle for using this method is when the value of the property depends on the profit generated from the business, not the physical building or location.

Question 4

What is needed in order to use the Profits Method of Valuation ?

Answer 4

Relevant financial information. Most notably audited accounts from the last 3 years.

Question 5

What happens if there is a relatively new business operating and there are no financial accounts ?

Answer 5

Request a business plan.

Question 6

Explain the methodology of The Profits Method of Valuation ?

Answer 6

Annual Turnover (Income received)
Minus - Costs/Purchases

= GROSS PROFIT

Minus - Working expenses

= UNAJUSTED NET PROFIT

Minus - Operators costs

= ADJUSTED NET PROFIT (Fair maintainable operating profit)

Which is then capitalised at an appropriate yield to achieve market value.

Question 7

What does FMOP refer to in the profits method of valuation ?

Answer 7

Fair Maintainable Operating Profit

Question 8

How to you work out the Adjusted Net Profit ? (Fair maintainable operating profit)

Answer 8

Using EBI -TDA

Earnings
Before
Interest
Taxation
Depreciation
Amortisation