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Business Valuation Business Valuation - the Direct Market Data methodAt a recent conference I was extolling the virtues of the Direct Market Data method for appraising small and mid-sized businesses. Over 96% of NZ businesses are in this sector. DMD has been defined as ?a method of appraising closely held businesses that uses information on actual sales of other closely held businesses (comparables) to estimate the value of the business being appraised?. Based on the realities of the market and using simple arithmetic the method is readily understood by buyers and sellers and reflects the motivations of the parties. Simple is not always easy. The method needs to be used with caution. The price indication can be persuasive but is not conclusive and it always preferable to cross-check the opinion with at least one other method, e.g. capitalised earnings. However, the market is the market and any value relying purely on academic calculations is living dangerously. LANDLORDS FACE REALITY? Many landlords will have to face reality. With most businesses experiencing some drop in sales coupled with increasing expenses landlords can no longer expect an automatic rent rise when their lease comes up for review or renewal. In today's market it is usually preferable to keep a happy tenant even it means accepting a slightly lower rental. Finding a replacement tenant may not be as easy as it has been in the past. We know of one experienced hospitality operator who recently was unable to reach agreement with his landlord on rental at renewal time, pulled the plug, and cleared out the premises within 48 hours. They will not be easy to re-let! As with house prices, rentals do not rise forever. |
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