Appraising a ‘Going-Concern’ Business

Petrol gas station

At North by Northwest, we specialize and are particularly adept at “going-concern” appraisals. Going-concern value refers to the total value of the real estate plus the ongoing business operation. Going-concern value is by nature more complex than most other commercial appraising, and particularly complicated are convenience stores. We’ve seen one particular scenario several times with convenience stores. This is when the retail store is leased and the fuel profit goes to the landlord or business owner. 

The fuel sales going to the property owner is not an uncommon arrangement. Usually the fuel sales are either 100% or 50% belonging to the property owner. Per the lease agreement the owner will receive rental income and income from fuel sales. The complication is that the typical appraisal approach for a leased property is to compare it to other leases and then capitalize or discount the net operating income to derive a value. This is where a lot of appraisers can go wrong. They may use a real estate cap rate when valuing the income from the fuel sales.

Why Not to Compare Fuel Income to Real Estate Cap Rate

When I spoke to appraiser Zachary Northcott he explained why an appraiser, in this situation, shouldn’t compare the fuel income to a real estate cap rate. He said, “When capitalizing fuel profit, you’re not just dealing with real estate. You’ve also got to consider the fuel equipment and any potential intangible value.” At North by Northwest, there are two approaches for how to capitalize the two income streams. One approach is to value the real estate by real estate capitalization rate and then value the fuel income using another overall rate derived from sales of owner-operated convenience stores. Then we analyze the two separate values as part of the whole. Generally no discount is warranted and the total market value is simply the sum of the two values. 

Another approach is to use a blended capitalization rate (blending a real estate capitalization rate and a going-concern overall capitalization rate which includes real estate, equipment, and potentially intangible value) and divide all of the income (both rental and fuel profit) by that rate. This is not exclusively a real estate cap rate. In one particular Brew Thru we went with a separately valued income stream.” 

Why Convenience Stores differ from other Going-Concern Properties

I asked Zach if appraising going-concerns has changed the way he approaches other similar properties. Zach explained that when he does an appraisal for any going-concern, whether it’s a convenience store or something else like a car wash, a brewery, or a grocery store, he always considers where the income is coming from. In this case an appraiser has to ask, what is the most appropriate way to value this income stream? Is there equipment and/or intangible value included in this income stream? 

Zach’s said that his experience doing going-concern appraisals has made him reassess how the best metric for rent or value might not always be square foot or per unit. For instance, with a convenience store, the most relevant metric for rent is rent as a percentage of gross profit to the tenant. This has made Zach rethink other property types. Is the square foot the most relevant metric for the market? However, most other going-concerns don’t have multiple moving parts. Unless there are multiple ownership interests, going-concerns like a grocery store, for example, wouldn’t be super complicated. Find out more about our methods of business by contacted us today.