The Importance of Correct Valuations

Valuations are required for a variety of reasons such as sale purposes, company asset purposes, tax purposes and it is important to ensure that every valuation is correct and the best method to ensure this is to employ a chartered surveyor with considerable experience within the chosen field.

There are a number of areas to consider when valuing a business which combine an asset based calculation and profit based calculation and while these methods are general guidelines it is important to realise that no two businesses even in the same industry are identical so each property/business must be considered on its own merits.

In regard to the value of Garden Centres, there are three basic elements:-

1. The value of the asset, the land, infrastructure and buildings where the planning consent will have an important part to play.

2. The trading potential of the business, i.e. the level of turnover and profitability that is being shown and future potential can have a major part to play.

3. The value of any concessionary income, (aquatics, pets, clothing, farm shops etc.)

4. In addition, there is the stock and moveable plant and machinery, the value of which normally needs to be generally understood when a purchaser is making an offer but where the final value is not normally agreed until just before completion on the basis that stock values will fluctuate.

The value of the land, infrastructure and buildings will depend on their location, their size, their age and condition and what planning consent exists.

Having a planning consent to extend, that has been or can be implemented will add value as it gives purchaser certainty that they can expand the business rather than hope value that a planning consent will be forthcoming.

The best way to arrive at a value is via comparable evidence, i.e. actual deals that have been undertaken, particularly those where the valuer has been personally involved.

When considering the value of the trading potential, experience of the particular industry is paramount as a valuer needs to look at the turnover and be able to compare it with other similar businesses.

Similarly, the level of the gross margin, if it is too high, can a purchaser sustain it, if it is considerably too low, is the business owner buying business by selling product too cheap? If a purchaser then increases the gross margin to industry averages will turnover drop because customer’s loyalty only relates to the fact that the product is cheap?

Where there are clear opportunities in increasing margin perhaps by greater efficiency and buying, then this increased margin will flow directly to the bottom line, increasing profitability and thus, value.

One must also look at the costs of the business, how do staff costs compare as a percentage of turnover to the industry average, what is the marketing expenditure, how much is being spent on maintenance repair? If it is too high does this mean that the buildings are too old and in poor repair?

How high is the rateable value, could it be appealed and thus, reduce costs?

Operating profit which we define as trading profit before tax, director’s costs, interest charges, depreciation and other extraordinary costs has to be taken into consideration. This gives an indication of the revenue stream that a potential purchaser can hope to achieve prior to his own expenses and the finance required making the purchase.

This figure can be amended to reflect low staff costs or other exceptional items such as putting capital works through as repairs and renewals.

Against the operating profit a multiplier is applied and the level of this multiplier will depend on a variety of aspects, the sustainability of the profit, the potential for additional profit and here, the experience of the valuer in selling similar types of businesses is paramount.

The third area of value is concessionary income where an appropriate multiplier will be applied to the income generated by concessions which will vary depending upon whether the income is inclusive of onsite costs and utilities or nett.

Again, this multiplier will vary, for example, if the concessionary income is considerably higher than one would normally expect, then the multiplier will be lower because there is the possibility that if the existing concession leaves, a new concession would pay less rent. If the concessionary income is lower than expected, then the multiplier is likely to be higher and again, it is important that the valuer has detailed knowledge of the industry.

Valuation is both an “art” and a “science” To ensure an accurate valuation, nothing is more important than the valuer having detailed experience of the industry, which must include actually being involved in sales, acquisitions and lettings.

If you require a valuation of your garden/plant centre or horticultural business please contact Simon Quinton Smith for a confidential discussion on 01635 262520.