Goodwill valuation: the importance of location

Location is one of the most decisive factors in the success of a business, and therefore in its value. Indeed, the location of a sales outlet has a direct influence on foot traffic, visibility, and therefore potential sales.

Valuing a commercial location, especially a "premium" one, requires a detailed analysis of several criteria in order to determine its real value and profitability prospects. This article details the main techniques for valuing a commercial location.

I. Key factors in the value of a commercial site

1. Visibility and accessibility
   
   A location in a high-traffic area, with high visibility (main street, crossroads, near a railway station), is a major asset in attracting potential customers. For premium locations, this visibility is often enhanced by remarkable architecture or a strategic position (e.g. Champs-Élysées in Paris, Oxford Street in London).
   
   • Performance indicators: Number of passers-by/day, public transport accessibility, visibility from main thoroughfares.
     
2. Attractiveness of the catchment area
   
   The catchment area, i.e. the geographic space from which customers originate, is an essential factor in valuation. The size, demographic profile (purchasing power, age) and economic dynamism of this area are crucial indicators.
   
   • Valuation techniques: study of local competition, analysis of customer profile, calculation of average purchasing power in the area.
     
3. Proximity to renowned brands
   
   A location close to well-known brands or high-traffic stores (shopping malls, supermarkets) increases the value of the premises. In the case of "premium" locations, being located next to luxury brands or in prestigious districts (Golden Triangle in ParisMayfair in London) significantly boosts valuations.
   
   • Valuation technique: Study of rents charged by well-known brands in the vicinity, and estimate of the additional flow generated by this proximity.
     
4. Area development trend
   
   Another criterion for valuing a location is the area's development potential. Neighborhoods undergoing expansion or gentrification, with future urban projects (new metro line, renovation of public spaces) can attract high-potential businesses.
   
   • Indicators: Urban development plan, real estate projects and future infrastructure.

II. Techniques for Valuing a Business Location

1. Comparable rent method
   
   This method consists of comparing the rents of similar businesses located in the same geographical area. It enables us to estimate the rental value of a location, taking into account the type of business and local appeal.
   
   • Premium" location: In premium areas, rents can be much higher due to high demand. For example, a space on the Champs-Élysées can rent for over €15,000/sq.m/year, compared with much lower rents in less upscale areas.
     
2. Sales multiple (sales)
   
   For some businesses, the value of a location can be based on the sales it generates. A premium location, because of its visibility and high foot traffic, can generate above-average sales.
   
   • Calculation: Annual rent can be calculated as a percentage of potential sales generated by the location (generally between 6% and 10%).
     
3. The rate-of-return method
   
   Used to estimate the profitability of investing in a commercial location, this method involves dividing the annual rent by the acquisition value of the site. A premium location often offers lower rates of return, as investors are willing to pay a premium for location security and income stability.
   
   • Example: In premium locations, rates of return are often lower, around 3% to 4%, compared with rates of 6% to 8% for more peripheral locations.
     
4. Discounted Cash Flow (DCF) method
   
   This method evaluates a location by taking into account future cash flows (rents, property revaluation) discounted at the required rate of return. For a premium location, sales and rent growth forecasts may be more optimistic, due to the strength of the market and the prestige associated with the location.
   
   • Advantage: Allows you to integrate long-term valuation scenarios and anticipate the revaluation of the property.

III. Specific features of "Premium" Locations

Premium locations require special attention, as their value does not depend solely on conventional criteria. Here are a few things to consider when valuing a premium location:

1. Scarcity and exclusivity
   In the most sought-after neighborhoods, supply is limited, driving up prices. Rarity plays a crucial role in valuation, particularly in historic or tourist areas.
   
2. Prestige and brand image
   A premium location provides exceptional visibility and strengthens the retailer's brand image. Proximity to monuments, luxury boutiques or highly touristic areas adds intangible but strong value, justifying a significant additional cost.
   
3. High rents and fierce competition
   Premium locations are often associated with very high rents, implying the ability to generate significant sales. Retailers also face fierce competition for access to these locations.

Conclusion

The valuation of a commercial location, particularly a premium location, is based on a complex combination of economic, geographical and strategic factors. Careful analysis and the use of a number of valuation techniques enable us to accurately estimate the value of a location and forecast its profitability prospects.
For premium locations, rarity, visibility and proximity to prestigious brands play a crucial role in establishing their value.

You wish to obtain a precise and detailed valuation of your business , taking into account its location (a consultant will contact you within the day):