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Running a Business

Veteran international investor John Corey comments

There was a recent conversation online which started with a question similar to the following. “If someone buys a few HMOs with the titles owned by the same limited company, what would the value of the company be when it is sold?”

They were looking for an income or profit multiple by which to value the company. The person was asking because they were evaluating a business strategy (portfolio building and then exiting by selling the company). They imagined that it would be repeatable if they could sell at a premium.

A few people with more business experienced explained that there was limited room for a premium to be achieved. The value of such a company is nothing more than the assets which the company owns. The company would be considered an investment company rather than a trading company. For investment companies, the market has traditionally not applied a signification premium. In most ways the future income stream that a company represents is already built into the value of the assets. Trading companies are valued as the sum of the assets plus the ‘goodwill' attached to the future trading that will continue after the sale. An investment company will not attract similar goodwill.

As it turns out, the history of the UK property sector shows investment companies which hold commercial property will tend to trade at a discount to the sum of the parts. A discount to Net Asset Value (NAV) is how they say it in The City.

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