7. Profits Method of Valuation

Question 1

What is the purpose of the profits method?

Answer 1

Where the value depends on the profitability of business and its trading potential (Trade related proeprties)

e.g. pubs, petrol stations, hotels, healthcare

Question 2

How should accounts be analysed?

Answer 2

Must have accurate and audited accounts if possible for 3 years.

use estimate/business plan if needed for new business

Adjust for maturity of business and any unacceptable or exceptioal items of expenditure.

Question 3

What is the simple methodology for the profits method?

Answer 3

Annual turnover (income received)

Less costs/purchases

= Gross profit

Less reasonable working expenses

= Unadjusted net profit

Less operator’s remueration

= Adjusted net profit known as the Fair Maintainable Operating Profit (FMOP)

Question 4

Explain how the profits method can be expressed as the EBITDA

Answer 4

Earnings before interest, tax, depreciation and amortisation

Capitalised at appropriate yield (YP multiplier) to achieve market value

Cross check with comparable sales evidence