A valuer comes to call
Valuations underpin nearly all financial decisions from home mortgages to major investments and corporate finance transactions and there are many reasons why you might need a valuation of a business property, such as a childrens day nursery.
The article was first published in the Sept/Oct issue of Nursery Management Today
You might need a valuation at your Banks request to raise funds to extend or refinance and, as such, the valuation will be required for loan security purposes. If you are thinking of buying, selling or renting a property, you may wish to commission an independent valuation to ensure you’re not overpaying for an asset, or underselling your own business. Valuations may also be needed for incorporation in your year end accounts or for insurance purposes.
Given the wide range of purposes that a valuation may be used for, it is a complex professional exercise. Valuations can be produced on different assumptions – and may come up with different answers – depending the experience and market knowledge of the valuer. For this reason a competent and impartial valuation is essential by RICS qualified and regulated Valuer to ensure accurate valuation advice is obtained from a qualified and experienced professional.
As a Chartered Valuation Surveyor, Courteney Donaldson MRICS, Head of Childcare at Christie + Co, outlines the main considerations that Valuers will have when they come to call.
The valuation of a nursery business consists of four primary elements:
- The Property
- The Business
- Financial Performance
- The Market
On what title is the Property held? It is freehold, leasehold or held on a licence? The Valuer needs to understand the legal title on which the Property is held and the boundaries to which the Property extends. If the Property is held on the residue of a lease, the terms of the lease need to be closely examined as some provisions in a lease, such as a non-assignment clause, or a lease which is personal to a named individual as the tenant, could have a material impact on value.
The National Standards for full day care, which have been adopted under EYFS, have specific requirements in relation to the physical environment. For valuation purposes the premises must comply with all National Standards. From a Property perspective core areas of consideration include the Valuers assessment of compliance with regards to:
• The condition of the Property in terms of maintenance, repair and evidence of ongoing or scheduled capital investment
• Compliance with local planning and developing control requirements, alongside other regulatory compliance associated to Fire Safety, The Equality Act 2010 and Asbestos.
• The nursery kitchen should be of an adequate size to cater for the effective operating capacity of the nursery and the kitchen must conform to environmental health and food safety regulations.
In forming their opinion of value, the Valuers will have to regard:
Registered capacity of the property: What is the maximum number of children the Property is capable of accommodating, what is the effective operational capacity and whether are there any planning conditions which restrict operation to a specific number of children.
Occupancy: What is the average annual full time equivalent (FTE) occupancy and how have the business FTE occupancy levels tracked month on month and year on year.
Trading Format: The Valuer will need to understand where the business draws its trades from; this could vary significantly depending on location. If the nursery is reliant upon servicing a large number of families all employed by one large local employer, there could be a degree of risk to occupancy levels were the employer to reduce their workforce, cease trading or open a work place nursery on site.
Much consideration will be given by the valuer to all business operations and matters associated to staff recruitment, retention, training, qualifications and rates of pay.
Value is usually arrived at by a reference from a multiple of profit, based on the level of ‘fair maintainable operating profit’ (FMOP), that a reasonably efficient operator (REO) would expect to achieve. It is therefore necessary to consider:
Historic performance: The financial performance will be demonstrated by the accounting information supplied. The Valuer will request audited profit and loss accounts for the past two to three years, along with which they will need to have sight of year to date management accounts and any budget figures or projections available for the forthcoming year.. The Valuer will seek to identify any personal costs, non-recurring, or one off items of expenditure that would impact upon the level of profitability demonstrated by the accounts.
Current performance: Year-to-date management accounts and financial projections for the forthcoming year end should inform the Valuer’s view of the level of profitability that the business should be capable of sustaining. The level of profit is usually expressed as adjusted net profit or EBIDTA (earnings before interest, tax, depreciation and amortisation) to facilitate comparison with other similar business transactions. The Valuer will have regard to the previous financial performance but they may not feel obliged to adopt prior levels of performance in their entirety. Within their report the Valuer should clearly explain any significant differences, trends and assumptions they have made.
Prior to completing the mathematical exercise of valuation, the Valuer will need to consider where the business sits in the context of the local operating market and the transactional market.
At an operating level this could lead to a review of:
Demographics: Demographic and socio-economic background of the catchment area and how this fits against national or regional averages. This can be a good indicator of factors such as possible demand for the service, availability of staff, probability of attracting new children and so on.
Amenities: Local infrastructure can affect the performance of a business. Is it on a local public transport network for parents and staff? Are there large companies nearby that the nursery is reliant upon for sourcing the trade and were such large employers to relocate, what would the impact be upon the nursery business?
Local market: To include the number of nearby nurseries, quality, fee levels, trading profile and so on.
Local competition: The quality of the property being valued relative to its competition.
Nurseries are bought, sold and valued regarding the profits methods of valuation whereby an all-risks YP (years’ purchase)/multiplier is applied to the fair maintainable operating profit to provide a capital value. This value includes the property interest, business or locational goodwill, and fixtures and fittings, all as a single figure. It is not the sum of the constituent parts.
The Valuer must have a clear knowledge and understanding of the nursery market and have access to data gained from comparable nursery business sales. They require this sales evidence and analysis in order to benchmark the nursery they are valuing against sales or acquisitions evidence available for similar, broadly comparable day nurseries. Every day nursery is different, in terms of location, trading profile, customer base and trading performance. It is essential that the Valuer closely examines evidence from day nursery sales, and understands the intricacies of the nursery business sales they are appraising in order for the Valuer to form an opinion as to which transactions are directly comparable to the subject property/business.
The YP selected by the Valuer needs to be carefully evaluated to reflect the security of revenue streams, potential for growth or diminution in trade, the attributes or shortcomings of the property or business, the strength of demand from purchasers and the desirability of the asset in locational, property and business terms
There are an abundance of often complicated factors to consider when valuing a business, and you should always ensure you use a RICS qualified and regulated Valuer to guarantee you get the most accurate valuation advice and to ensure the process run as smoothly as possible – leaving you safe in the knowledge the valuation of your business will be in safe, experienced and professional hands, and you’ll be receiving the best possible professional advice.
Courteney Donaldson MRICS has specialised in the nursery sector since 1999, providing valuation, transactional and advisory services to operators, banks and investors. In one capacity or another, she has been involved in every major nursery transaction since 2006. She can be reached at Courteney.Donaldson@christie.com, or you can follow her on Twitter, @courteneyccs