Fair price can be defined as the amount of money that a person deems reasonable to pay for something. For example, arriving at a fair price is one of the goals and objectives of the reality TV show American Pickers.
Here, antique and collectible pickers Mike Wolfe and Frank Fritz travel around the country to buy or “pick” various items from collectors and hoarders for resale, for their clients, or for their personal collections.
The fair price they are willing to pay for items is determined by negotiating a price or “haggling.” On the show, it is always depicted that when Wolfe and Fritz meet the people who own the items they want, they always negotiate a fair price down from a set value that the person has in mind.
On the other hand, if the pickers should sell one of these items at their retail store, the acquisition price becomes cost of goods and the retail purchase price a fair value (market).
If the item were real estate instead of merchandise, the retail purchase price could be considered a comparable sale.
How do the pickers know how much to offer and pay for items? In most cases, they know from experience. However, when they don’t have an idea of what is fair, they usually call up a market expert to provide them with an opinion of value.
Unlike a property appraisal, the purpose of an opinion of value is to determine a price that will result in a change of ownership. Here, experience shows that buyers and sellers of small balance properties will often judge the value of a business in relation to revenue, earnings, rules of thumb, and sometimes bad advice. The latter of which has been exacerbated by the Internet of Things.
For example, I came across a website devoted to starting, financing, and managing small businesses that featured a blog on how to value a car wash business.
The author, according to the bio, is a mother of three who draws directly from past experience and interests in areas such as insurance, photography, fitness and nutrition, birth journals, and self-help. I don’t doubt her background and knowledge, but the author has zero experience in the car wash industry or valuing businesses.
Even real estate professionals can be a source of bad advice. For example, one expert suggests the best way to determine a fair price for a car wash is to multiple average annual earnings by 2.0 or 2.5 for a particularly successful location.
The problem with such rules is that they are based on average multiples derived from transactions involving companies that may or may not be comparable to the subject company. They may also be based on subjective judgment or word of mouth rather than objective sources of verifiable data.
Real estate professionals may also suggest supplemental valuation methods to help potential buyers feel good about the investment. For example, if it’s difficult to prove all earnings, such methods may include using water bills, assumptions of water used per wash, and average price to estimate revenues.
If you are looking to buy a car wash or sell one, my advice is to ignore this type of advice. For instance, if earnings are difficult to document, or not reported in their entirety, it will be very difficult if not impossible to determine a reasonable price or fair value.
There are several methods that are commonly used to prepare an opinion of value.
One method is to use market comparable data or comps, which are recently sold assets that can be used to determine the value of similar assets. Key considerations are that comps data should be purchased from a reliable vendor and the comps data must be comparable. In other words, it would be inappropriate to use comp data for an express exterior to develop market values for a full-service or flex-serve wash.
If the car wash is well established, the capitalization of excess earnings method to value may be a better choice because this method allows for calculation of goodwill value. Goodwill is part of the business value over and above the value of its identifiable business assets and is useful in negotiation a final price.
In some cases, it may be appropriate to use a discounted cashflow approach. Here, value would be based on the owner’s earnings projections and risk assessment.
And finally, there is the practice of using several methods and reconciling the results into a concluded value.
The value proposition for an opinion of value is price evaluation for buy/sell transactions. Opinion of value methods are not appropriate for estate planning, tax assessment, litigation, going public, and other purposes that require a formal property appraisal.