Profits Method

Question 1

When is the profits method used?

Answer 1

• For trade‑related properties where value is linked to business performance, such as pubs, hotels or care homes.

Question 2

What is the basic methodology of the profits method?

Answer 2

• Start with turnover; deduct cost of sales to calculate gross profit.
• Deduct working expenses to obtain net profit.
• Deduct operator’s remuneration to determine Fair Maintainable Operating Profit (FMOP / EBITDA).
• Capitalise at an appropriate yield.

Question 3

Why are audited accounts preferred?

Answer 3

• They provide reliable, verified data and reduce valuation uncertainty.

Question 4

What is Fair Maintainable Operating Profit (FMOP)?

Answer 4

• The maintainable profit a reasonably efficient operator could achieve at the property.

Question 5

Why cross‑check profits method results with comparable sales?

Answer 5

• To benchmark results against market activity and ensure reasonableness.

Question 6

When might business plans be used?

Answer 6

• For new businesses or where historic trading data is unavailable.