Quick Lube / Carwash

[Austin]

Steve Vertin:

Look back in the achieves of “The Appraisal Journal” around 2000 and you will find an article about a new proposed theory of doing business valuations. Here is the crux of what the article says and the reason I like what it says is because it is consistent with appraisal theory specifically H & BU theory.

Going concerns consist generally of these factors of production: Real estate interest fee or leasehold, trade fixtures, inventory, FF&E, and going concern value. To be consistent with appraisal theory the net operating income should be allocated accordingly in this order: adequate return at the going rate to real estate, same for trade fixtures, same for FF&E, dollar for dollar for inventory, and any residual is considered going concern value capitalized at a different rate.
The reason this view of the subject is consistent with appraisal theory is because it morrows H & BU analysis in that we must value property based on its H & BU which could be either a going concern or a liquidated concern in which land & other assets are worth more than the going concern.
The problem I have with this as I tried to explain above is that under USPAP if you use this theory it would require about five separate appraisals & reports because knowledge of the value of each component is required and must be reported. Appraisal of the real estate, appraisal of trade fixtures, appraisal of FF&E, appraisal of inventory, appraisal of going concern value and an appraisal of the total going concern. To be in strict compliance with USPAP would require reports complying with six sets of development and reporting standards. That is why the MAI instructor at the Appraising Nursing Home Facilities class would not answer my question, he knew it was a requirement and he knew it was impossible to comply with and he knew I know he is ignoring USPAP and doing it the easy way, which is generally correct if the home is generating enough income to survive, but not strictly USPAP compliant in my view.
There was a large advertisement in our Sunday paper for a business for sale. It is a sandwich shop on the ground floor of an 80-year-old 11-story functional obsolete office building presently under foreclosure proceedings. I use to eat there and about six months ago I went in and the owner told me a person had walked in, offered her cash for the business, and she said OK and that day was her last day because the purchaser wanted immediate possession. The shop has been closed since. Now it is advertised as business for sale. What are they selling? Can you hold a leasehold interest in a property under foreclosure? No real estate interest, no inventory, little FF&E, few trade fixtures consisting at most of a stove refrigerator, and no going concern income offered for $45,000.

PS: I use to be in the auction business and have liquidated many a restaurant. I estimate about $7,000 as liquidated value of assets on a good day.

 

[Fred]

new proposed theory of doing business valuations

Austin, you always seem to be posting about a “new theory” that sounds a lot like the old theory to me. But I admire you obsession to find the truth.

as I tried to explain above is that under USPAP if you use this theory it would require about five separate appraisals & reports

Only need one report. USPAP dictates no form, format or style of reporting. RE appraisers don’t need multiple reports to do the segregated values of the cost approach.

Theories aside, I think you will find that break up value of small businesses is only higher than going concern value when business and realty are in one ownership rather than in rented premises.

 

[Austin]

Steven:

I suffer from the NCAB syndrome so humor me; I am paranoid. Ok, one report but how about the five appraisals. My concern is the subject of our discussion the other day about going concerns valuing their property at book value (depreciated book tax value) and ignoring market value with the consequence of being sold and liquidated by corporate raiders. I am trying to reconcile the fact that if the value of the parts is more than, less than, or equal to the whole, then we have three definitions of market value to deal with. We have market value of the going concern in which case the components contribute use value equal roughly to their DRC, we have a market value of the parts at market value, and we have a gray area in between that requires a knowledge of both market value and use value to make the determination of which is relevant and to answer the question of timing. I think we both agree what the problem is, but my problem is reconciling how to protect myself and cover all of the bases. If I did an appraisal on a business like Vertin described at 6 times gross and it turns out that the value of the real estate is worth twice that amount or the business goes belly up and the assets sell for half that amount, then where is the appraisers shield? If the appraiser had done a proper evaluation of the property situs in its economic environment he should have foreseen where the property was heading. For some reason I just don’t feel comfortable about not covering all of the bases. To me this one of those little glitch situations like NASA keeps running into every time a shuttle crashes. The culture is to blame for ignoring the signs of impending calamity if you follow my line of reasoning. We should have addressed that little issue they say. Then some little insignificant line engineer says, "damn it, I told you ten times." The answer is: "Yea, it got stuck in the pipe line." I don’t want to find myself in high orbit and look out the cabin window on the way to re-entry and have to say: “Damn, where did the wing go?”

 

[Stephen J. Vertin MAI]

Austin:

I was not ignoring your comments. I had a computer crash at the beginning of this year and lost most of my financial data for 2003. The good news is I had hard copies. The bad news is I had to do my taxes for 2003 the old fashion way, by hand held calculator and stacks of paper. It took me four to five days. Most of the time was spent adding and subtracting. I finished this morning and need to start some appraisal work.

Anyway............, I have not read the article in the Appraisal Journal. If it has anything to do with reality tell me the date and title and I will read it. However, if it is one of those ivory tower theoretical egg head pieces I am not interested. At one time I may have been but I am more concerned with practical appraising now days. The reason I say this is because there is considerable gaps between theory and reality within this subject. Which I am sure you and Steve are well aware of. My comments are to be applied to practical application.

Steve Vertin

 

[Austin]

Steven Vertin wrote:

I had a computer crash at the beginning of this year and lost most of my financial data for 2003.

Same thing happened to me Steven. Lost most of my income statements but the expense items were all backed up. Strange things happen around April 1st. The Clinton legacy-no evidence, no crime. That is my story and I am sticking to it.