Whether valuing the Going Concern, Leasehold or Freehold (Subject to Lease) Interest of a service station, the overall concept is common for each valuation.
International Valuation Standards (IVS) 2007 details the definition and application of valuation approaches for property/real estate valuation reports as follows:-
Valuations of any type, whether undertaken to estimate market value or a defined non-market value, require that the Valuer apply one or more valuation approaches. The term “valuation approach” refers to generally accepted analytical methodologies that are in common use. In various States these approaches may be referred to as “valuation methods”.
Market based valuations normally employ one or more of the valuation approaches by applying the principle of substitution, using market-derived data. This principle holds that a prudent person would not pay more for a good or service than the cost of acquiring an equally satisfactory substitute good or service, in the absence of the complicating factors of time, greater risk, or inconvenience. The lowest cost of the best alternative, whether a substitute or the original, tends to establish Market Value.
The most common valuation undertaken is that of the Freehold Interest (Subject to Lease). The primary method of valuation for this interest is the Income Capitalisation Approach. The most important factor in this approach is determining whether the current or estimated rent, is to market. The market rent is a function of business revenue which, in a service station, is dependent upon various factors including but not limited to exposure, access, fuel range/canopy height, building condition/layout, on-site parking and competition.
The second most important factor to determine in this method is the capitalisation rate, which must be obtained from comparable sales evidence. In both instances, the assessment of rent and yield require industry specific knowledge and valuations are best undertaken by a specialist.
The valuation of a Going Concern also employs the Income Capitalisation Approach, whereby the income is the Net Operating Profit (NOP). The NOP is derived from analysis of the business revenue and deduction of the Cost of Goods and Operating Expenses. Once the NOP is established, a suitable capitalisation rate is applied which is again selected from comparable sales evidence. Industry expertise enables the valuer to access an array of in-house knowledge for benchmarking purposes, critical in the accurate assessment of a Net Operating Profit.
A secondary approach to the valuation of a Going Concern is the notional split of the Freehold and Leasehold values, which comprises the summation of both interests.
The valuation of the Leasehold Interest is identical to the Going Concern, save for the additional requirement to deduct the market rent from the Net Operating Profit.
Given the difficulty in obtaining critical trading information within this industry, its lack of transparency and knowledgeable selling agents, it is most important to employ a specialist valuer to ensure pricing of the asset is to market. For more information, please contact industry specialist, Michael Bryer.
Michael Bryer
Robertson & Robertson has 38 years experience in providing specialised service station valuation advice. If you are a business owner looking to sell or purchase or are seeking valuation advice for mortgage, leasing, taxation or legal purposes, our specialist valuers can assist you.
To enquire about obtaining a service station valuation or for valuation advice in general, please CONTACT US.