|
|
|
 |
Business valuation is typically based on three major methods: the income approach, the cost approach and the market (comparable sales) approach. The income capitalization approach is a commonly used and abbreviated methodology where current income and cash flow is reasonably stabilized and representative of continuing operations. Valuations that are determined as a multiple of reported income, or current cash flows, are a simple derivative of this approach. This tool illustrates the income capitalization methodology for a business valuation.
|
|
Definitions
- EBITDAR
- The net operating income of an enterprise is often characterized as EBITDAR – representing earnings (or net income) before interest, taxes (income), depreciation, amortization and rent. EBITDAR generally represents cash flow available to support the capital structure (debt and equity) of an enterprise.
- Provision for Management / Other
- In determining the appropriate level of income to be capitalized, certain adjustments may be required to reflect normalized amounts. For example, lenders and investors customarily require a provision for management costs equating to not less than 5% of operating revenue. Other non-operating or non-recurring revenue and expense items may be included in the reported EBITDAR. The Provision for Management / Other allows for the adjustment of reported EBITDAR to determine the more appropriate and normalized income level to be capitalized.
- Provision for Capital Expenditures
- The Provision for Capital Expenditures represents an adjustment to compensate for material deferred maintenance items or other immediate capital needs to restore property conditions required for continuing operations. For example, should a property require a new roof, a provision equivalent to funding this capital need may be considered. As a matter of routine underwriting practices, lenders and investors typically assume a recurring provision for capital needs. A customary annual reserve is not less than $300 per bed/unit – yet can vary widely depending upon the assessed condition of the property and its content.
- Capitalization Rate
- The Capitalization Rate or “Cap Rate” represents the rate of return used to calculate the capital value of an unlevered income stream. Cap Rates can vary widely by asset sector (principally market considerations) as well as by the physical and operational attributes of the property being valued. The Cap Rate is a reflection of the underlying cost of capital (debt and equity) contemplated. The capitalized value is calculated by dividing net operating income (or adjusted income as applicable) by the Cap Rate.
|
The Internet's Best Financial Calculators! Put them on your website!
|
|
