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Going Concern Appraisals

by Administrator on Feb 1, 2015 Business Appraisal 1436 Views

The investment value of a business, or its "going-concern" value, reflects the fact that an income generating business with real property assets generally has a value higher than its liquidation value since "going-concerns" are by definition established.

The value of a "going-concern" depends not only on its assets, like the underlying real estate and the inventory, but also on the business entity's ability to produce net profits over time.  Appraisers of "going-concerns" thus investigate historical profits and losses and attempt to forecast how it will perform in the future.

There are always a number of business related factors that can change a "going-concern's" future profits and as good as an appraiser may be at econometric forecasting and foretelling the direction of a specific industry there are no guarantees that the trends will continue.  Many businesses, like video rental stores, simply evaporate when consumer choices change direction. 

For real property appraisers, being able to appraise a "going-concern" is most important when you have; a business entity with a real property component being acquired / disposed of, a business entity in bankruptcy or when a business entity with real property is being condemned. It's important for appraisers to have experience doing business appraisals, and in some states licensing, before accepting business appraisals.  When doing special use properties it's important to have specific, specialized experience.  There are many licensed and designated appraisers who think they can appraise any property even if there is an associated business entity, but real property appraisal licensing and designation does not automatically extend into the business arena.

Some appraisal assignments and some appraisal guidelines require an appraiser to allocate value between the land, building, personal property and the business entity.  When appraising special-use properties like motels, hotels, bowling alleys, restaurants and storage facilities an allocation is difficult.

Appraisers of "going-concerns" often consider operating ratios and "rule-of-thumb" multipliers in an effort to match a business to its peers.  If peer businesses have been selling for three times (3X) annual gross income that number can be used as one of several indicators of value. 

Real property valuation methods are somewhat similar to the methods used to value "going-concern" businesses.  Comparable business sales often available via online databases are, like comparable real property sales, useful as indicators of value via direct comparison or via statistical indicators. Income and expense statements from a wide variety of business also provide appraisers with an indication regarding what is expected financially from a business since it is relatively easy for an owner to skew reported results.  The cost approach offers a method to value a business at start-up and the income approach used to value real property, using a capitalized net operating income, is similar to the discounted cash flow analysis used to analyze business earnings.

Notable is the fact that new businesses and established "going-concerns" have a significantly higher risk associated with their future benefits or future returns than real (bricks and mortar) properties.  Of course new businesses are extremely risky even when compared to established business. 

In the past it was assumed that a real property appraiser was qualified to appraise a business entity, but that assumption is less often made today.  Some states now require special testing and an additional credential, and it is likely that movement in that direction will continue.

For more appraisal information contact Glenn Rigdon, MA, MRICS, ASA a Las Vegas / Henderson Nevada appraiser via email at grigdon@cox.net or via his business website Horizon Village Appraisal (http://www.horizonvillageappraisal.com), or you can also click on “Contact Us” on the home page of this website.

Article source: http://www.appraisalarticles.com/Business-Appraisal/4528-Going-Concern-Appraisals.html

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