Profits Method

Question 1

When would you use the profits method of valuation?

Answer 1

Used for the valuation of trade related property where the value of the property is directly linked to the profit generated by the business e.g. pubs, petrol stations, hotels, guest houses, children’s nurseries, leisure, healthcare properties and care homes

Question 2

What do you require to conduct the profits method of valuation?

Answer 2

Accurate and audited accounts for 3 years

Question 3

How would you use the profits method of valuation to value a new business?

Answer 3

Use estimates / business plan

Question 4

What is the methodology for the profits method of valuation?

Answer 4

EBITDA (earnings before interest, taxation, depreciation and amortisation) is capitalised at an appropriate yield

Question 5

How should you verify a value obtained using the profits method of valuation?

Answer 5

Cross check with comparable sales evidence if possible

Question 6

Please can you summarise how you undertake a simple profits valuation?

Answer 6

Annual turnover
Minus costs/purchases
= gross profit
Minus reasonable working expenses
Unadjusted net profit
Less operator’s remuneration
Adjusted net profit known as Fair Maintainable Operating Profit
Can be expressed as EBITDA
Capitalised at an appropriate yield – YP multiplier to achieve MV
Cross check with comparable sales evidence if possible