Despite many factors affecting everyday New Zealander's such as inflation, higher unemployment predicted, higher interest rates and lower property values we continue to see demand for businesses of all types increase. Our buyer enquiries are at a record high and the range of businesses sought are wide and varied.

Tony Alexander in his Weekly ‘Tony’s View’ recently stated that net migration inflows have soared from -16,000 seven months ago to +33,000. Tony says people are yet to realise what is happening with our post-pandemic rate of population growth and the change has not yet entered popular consciousness.

Businesses have been hamstrung the last year or so with a shortage of staff. Are we now entering a new phase where we will see this shortage corrected and then a rise in unemployment? For those affected by redundancy, owning your own business is often a very good option. You have control of your own destiny. When there is a rise in unemployment the demand for small owner/operator businesses increases. Businesses such as retail food, laundromats, automotive workshops, hair and beauty, service businesses and trades related businesses are great options. And for the corporates out there leaving work as an employee investing in a larger business is an attractive option and can offer a very healthy return on investment.

Buying a business? Call us and we will connect you with the right specialist business broker. Looking to sell? It costs you nothing for a confidential discussion on your business and we will be happy to give you a price indication of where your business sits in the current market.

Laundromats, what you should know.

Laundromats are a very popular business to operate. Are you looking at buying or selling a Laundromat?

If you are we recommend you do your homework on understanding the IGC (Infrastructure Growth Charges) that Watercare may charge.  An IGC is a charge based on the water utilised from the premise and is reviewed annually.

A Due is payable on every 220kL of water utilised. There is a one off infrastructure charge for each Due. An example of the amount for a Due in metropolitan Auckland is $17,138 incl GST. It is recommended that all laundromat parties check with Watercare to check the baseline demand for the property.

Whilst we are talking about laundromats here, this also applies to all commercial premises and they may house a different type of business.

Businesses that typically use a lot of water should check this link out from the Watercare site.  https://www.watercare.co.nz/Water-and-wastewater/Building-and-developing/Fees-and-charges/Infrastructure-growth-charge-(IGC)

THE CAPITALISED EARNINGS VALUATION METHOD (Part One)

An important step in the valuation process involves the selection of an appropriate valuation approach and method. As the diagram below indicates there are three generally accepted approaches and a variety of associated methods to choose from.

While a number of combinations of approach and method are theoretically possible, it is apparent that in practice the very great majority of valuations are based on the application of the capitalised earnings method. Like all income based methods, capitalised earnings is based upon the application of generally accepted financial economic theory dating back some 100+ years and the early works of Irving Fisher as noted below.

"The fundamental position of capital theory is that the value of an asset is the future payments that it provides, discounted at the appropriate rate."

Irving Fisher, The Nature of Capital and Income, McMillan and Co, 1906

Irving Fisher's narrative is reflected in the simple two variable equation or formula set out below, which forms the basis of all income based valuation methods, including capitalised earnings.

The relative strength of the capitalised earnings method lies in its simplicity and the fact that only two variables, earnings and a required rate of return are necessary to implement the equation and to establish value. The relative weakness of the method is that it is a single period model in which one year's earnings is required to be established which will continue in perpetuity. Thus, while being conceptually simple, the model is quite capable of producing values which may be completely unrealistic depending upon the numbers assigned to the two variables.

In part two of this article in the next newsletter we will look at the process of establishing appropriate inputs into the two variable capitalised earnings equation / formula.