Difference between a Business valuation and a commercial property valuation

Introduction It is essential to understand that there are fundamental differences between how a business is valued and how commercial property is valued.

Commercial property The valuation is based on the Net Rent income (BEFORE interest, depreciation, amortisation & tax) Thus, gearing (debt amount) has no impact on the value The risk in the value is in relation to possible fluctuations in rent income – The Risk assessment is relatively easy.

The capitalisation/ discount rates are published by the Rode Report and SAPOA. It usually varies between 10% – 15%

Business valuation (Business Enterprise Value) The valuation is based on the Net Business Profit (AFTER rent, interest, depreciation, amortisation & tax Thus, the amount of debt (interest paid) has an impact on the value

The risk in the value depends on many factors: namely the gearing (solvency), cash flow, margins, product range, customer base, supply base, key management & personnel, corporate governance, etc. – Risk assessment is complicated

The capitalisation/discount rate is a complicated calculation based on the following: – A risk-free rate – Macro-economic systemic risk – The risk profile of the business – Liquidity/tradability risk – Expected growth of the business The rate usually varies between 20% – 30%

The productive assets are the assets utilised to generate income in the business, such as computers, furniture, equipment, and vehicles. It is not the stock in a retail business. The business value includes the value of the productive assets. Thus, embedded in the business enterprise value is the value of the productive assets.

When the property and the business are owned by the same owner Firstly, a notional market-related rent must be estimated. The property is then valued based on the notional rent Secondly, the notional rent must be subtracted from the Net Business Profit (AFTER rent, interest, depreciation, amortisation & tax). The Business value is then based on this amount

Kobus van der Walt Registered Professional Valuer Bsc Agric-Econ, M.Com (Business Management), MSc (Valuations)