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.