How to Value an Operational Entity
So how to value an operational entity? The valuation of operational entities is carried out for both freehold and leasehold assets and by definition means the purchaser or lessee intends to operate the business to create a profit. These types of properties include caravan and touring holiday parks, hotels, public houses and holiday complexes. Properties of these types are typically valued using the income approach and profits method of valuation, having regard to the property’s trading potential to include its freehold or leasehold interest and plant and machinery, by comparison with the sale of similar properties on the open market. When valuing a property as an operational entity, the first stage is to assess the Fair Maintainable Turnover (FMT) that could be generated at the property by a Reasonable Efficient Operator (REO), together with an assessment of the Fair Maintainable Operating Profit (FMOP).
FMOP is the level of profit stated prior to depreciation and finance costs relating to the asset itself, that the REO would expect to derive from the FMT. This is based on an assessment of the market’s perception of the potential earnings of the property, reflecting all costs and outgoings, as well as an appropriate annual allowance for periodic expenditure, such as decoration, refurbishment, and renewal of trade inventory.
The REO is a concept assuming market participants are competent operators, acting in an efficient manner of a business conducted on the premises. It involves estimating the trading potential, rather than adopting the actual level of trade under the existing ownership, and it excludes personal goodwill.
There is a distinction between the Market Value of a trade related property and the investment value, or its worth to the operator. When assessing the future trading potential, as valuers we should exclude any turnover and costs attributable solely to the personal circumstances, skill, expertise, reputation and/or brand name of the existing operator. Likewise, we should reflect additional trading potential that might be realised by a REO taking over the property at the valuation date.
It’s fair to say this method of valuation is not straight forward and requires experience, reasonable skill and expertise. Vickery Holman leisure team would be pleased to discuss the valuation or potential disposal of any trade related property across the South West.
