Even if you reside in the USA or Canada, your business valuation projects may require that you value a business outside of North America. You may have this question: do the valuation approaches and methods vary based on the business’s location?
In fact it does not matter where the business is currently located. As long as you use professionally accepted business valuation methods, you can value a company in the same way regardless of where it is currently based.
This contrasts with the real estate appraisal. Property location can make a major difference to such key valuation parameters as the capitalization rates. Why? Because a real property cannot be separated from its geographic location.
Businesses can locate operations anywhere
Businesses differ from real property in a number of important ways. First, businesses can easily relocate operations to a different geography. In addition, as companies grow they tend to create presence in a number of locations.
As a result, you should view business location as a value factor to the extent that it allows the company to reach its intended market. In this sense the business competes for desirable locations. Much the same as it does for capital, skilled workforce, a seasoned management team, favorable distribution and supplier agreements. So you should not view the location preference as a factor that affects business value in and of itself.
Same business valuation methods apply
Hence you can use the same business valuation methods to value a business located anywhere. For example, take a look at methods such as the multiple of discretionary earnings. It lets you account for the business location as one of the key value creating factors. But the actual geography of the business operations is not at issue here. What matters is how valuable the location is in helping the company achieve its financial goals.
In this sense a location in, say, Perth Australia may be more valuable to a company than a site in downtown New York even if the owners prefer New York for personal reasons.
Let’s say you are valuing an international operation with many sites across the world. Then each location is assumed to contribute to the company’s financial performance. So you focus on valuing the firm based on its earning power and risk assessment instead of the geographic location of its operations.
This comes out very clearly when you look at how the discount and capitalization rates are calculated using the build-up model. Country specific risk premium may enter into the calculation of the discount rate. What counts for the investors is how well the company does financially despite the risks in a specific geography.
In other words, the investors assume that management has chosen the right locations to maximize the returns for the shareholders. Beyond this the investors do not expect additional returns just because the company has selected a specific geography to establish its presence.