One of the greatest challenges for an agent is achieving a balance between client’s and purchaser’s expectations on value. There is no doubt that current interest rate levels and a feeling of uncertainty in the economy generally will have an impact on a purchaser’s appetite for new acquisitions. This is especially difficult to manage when we are coming out of a relatively strong, post-pandemic period of growth where premium prices were achievable in many sectors. Seller aspirations on the value they are likely to achieve from the sale of their asset are often based on optimistic examples of the sale of similar assets, rarely acknowledging that market conditions have changed and the subsequent impact this may have on value. A purchaser on the other hand will typically base their opinion of value on current economic trends and the impact this may have on the business they are considering, in the short to medium term.
When establishing a suitable sale price for any asset, it is always worthwhile sense-checking this against an asset’s value for secured lending purposes. The majority of assets that are purchased are done so with the assistance of some form of debt, so the agreed sale price has to broadly align with the value of the asset for secured lending purposes. Generally speaking however, a valuation of a trading property for sale will place more reliance on its potential to generate income in the future than a valuation for secured lending purposes, which is likely to apply greater emphasis on recent trading performance. As a result, a guide price for sale purposes will generally be more generous than a formal valuation for lending, accounts or similar.
The most significant variation between guide price and formal valuations occurs when there is an apparent change in economic conditions. In strong economic times, market confidence in the continuity of these conditions leads to purchasers and lenders having a greater appetite for risk and therefore a higher guide price may be suitable. Where market conditions have demonstrably changed for the worse however, a premium guide price may well discourage interest and thereby competition for the asset for sale. That said, a business generating secure, long term income will see less fluctuation in value compared to one which relies more on the sale and resale of goods or services to generate its income.
The nature of the asset being sold can also affect the level of guide price impact. If the asset being sold is likely to appeal to purchasers who already hold a portfolio of similar assets, then the confidence of both them and their funder in being able to realise some form of value from the business development upside will be strong – competitive tension is more likely to arise, and increased expectations of achievable price, if the asset class is widely understood and forms part of multiple portfolios.
A prudent agent will always cross-check their advice regarding a suitable asking price for sale against that of a loan security valuer, as in most cases borrowing will be required which will be needed to support a good proportion of the purchase price.