Why Business Valuations are different from Real Estate Valuations | Daily News

Why Business Valuations are different from Real Estate Valuations

L.A.N.Jayewardene
L.A.N.Jayewardene

Real estate valuation and business valuation are two different professional disciplines with conceptual commonality. But the procedures, language, knowledge and experience required for each are very different. This primarily flows from the fact that what is being value is quite different.

With the growing intensity of acquisitions and mergers, development of the capital markets and, the encouragement of value-oriented management, the technique of the business valuation is becoming common place in the Corporate World today.

Similar to real estate valuations, there are three mostly accepted business valuation approaches, the income approach, the cost approach and the market approach.

The income approach is conceptually similar in both business valuations and real estate valuations. The core is that there is a direct relationship between the amount of income earn and its value. However, in most cases, estimating an income stream for an operating business entity is very different than estimating an income stream for an income producing property such as an apartment or an office. Furthermore, in business valuation, the risk of an operating business is very different in assessment and quantification than real estate risk.

The cost approach of business valuation is somewhat akin to the asset approach of real estate valuation. This approach is based upon the principle of substitution premise that a prudent buyer will pay no more for a property than it would cost to acquire a substitute property with the same utility. However, except for assets that may be liquidated, the business valuation is not interested in assets itself, but rather in assets as they contribute to the value of the business enterprise.

In market approach, a real estate value is most often looking for what similar properties have sold in meaningful proximity. On the other hand, in business valuation seeks financial data arising from transactions in comparable business to determine applicable valuation parameters such as Price/Earning, Price/Cash flow, Price/Sale etc.

The writer, L.A.N.Jayewardene is a Chartered Valuation Surveyor, holds the following qualifications:B.Sc. (Estate Management & Valuation) (USJ), M.Sc. (Real Estate) (UCEM) (UK) and M.R.I.C.S. (UK), A.I.V. (IVSL), P.V.A.I. , F.M.V.A.