September 24, 2018  
 
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How to Buy a Business

 

The Highest and Best Use

Written by Bobby Jan for Gaebler Ventures

If you are looking to buy a business, be sure you are getting a good deal. Understanding business valuation inside and out is the best way to find an underpriced opportunity. This article covers the concept of the highest and best use, which is a very important concept in business valuation

If you are looking to buy a business, you are probably to looking for a good bargain.
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In order to know a good bargain when you see one, you must have some understanding of business valuation. This article covers the concept of the highest and best use, which is a very important concept in business valuation.

The highest and best use is a concept of property appraisal. This concept tells us that the value of a property should be estimated in anticipation of its highest and best use. The highest and best use of a property is often its current use but this is not always the case.

The definition of the highest and best use varies but generally the use must be:

  • Legally allowable - all illegal uses of a property should definitely not be entertained.
  • Financially possible - this means that the revenue generated by the property must justify any investment into that property.
  • Physically possible - this means that the use of the property must fall within the physical limitations of the property.
  • Maximally productive - the highest and best use of a property should generate the highest profit possible for the owner.

A good bargain often comes when a property is not at its highest and best use. Sometimes, a business could be acquired for less than its liquidation price, which obviously means that the assets were not efficiently allocated. Understanding the concept of the highest and best use will help you find these bargains.

Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.

Related Articles

Want to learn more about this topic? If so, you will enjoy these articles:

Price Versus Value When Buying a Business
Valuation Process
Valuating a Company
Reasons to Value a Business
When to Get a Business Valuation


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