Hi anyone here got experience in buying small commercial freehold shop with business. How do you value the business if not worth much how much would you offer for the land? What are the pitfalls to watch out for?
I am looking at hopefully purchasing existing business with freehold but will rent it out!
thanks
POS it depends on the type of business – however it is worked on a multiple of profit. You will need your accountant to review a number of years of business records to determine whether the profits are realistic and sustainable, whether they are cooking the books or whether there are timebombs under the figures.
As for the freehold, you will need to determine what the building is worth (cap rate on market rent) as well as adjusted comparable sales (with either vacant possession or tenant in place – indicating yield).
If the business is not currently paying rent, you will need to take rent into account when determining the value of the business.
SNM
Thanks Scott how do i value the purchase price for the freehold! is there a forumla?
Get a commercial property report , speak to the local agents, etc (all the usual suspects).
Do your research via RP Data etc – if it is a regional area with few comparable sales you may need to search other areas with similar characteristics/demographics to determine appropriate rents/caps etc.I found out that the yearly rent if rented would only be at the maximum $16200 then you have rates etc on top of that. the asking price is about $330,00 but i don't think the business is worth much. It is a small retail shop 90m2. What would be a fair price to offer? Not sure how commercial properties work with regard to residential.
any advice!
Hi, commercial property is valued by the yield. The going rate is around 6.5% for shops in less desirable locations & less for prime locations. You can do the sums yourself.
Outgoings eg. rates, insurance etc is paid by the tenant. GST is not part of the net yield either.
The yield used to be around 10% [about 2-3 years ago before commercial property went ballistic]
If the rent is $16200 and asking price is $330000, the yield is under 5%.
So if you think that the maximum rent is what you mention, then you need to have some really good reasons to pay $330000 for the shop.
Hope this reply helps you evaluate the deal.
KY
You must be logged in to reply to this topic. If you don't have an account, you can register here.
