Duncan's Bookstore: Connecting Real Property and Business Valuation

Abstract

EMIL E. MALIZIA University of North Carolina at Chapel Hill. Campus Box No. 3140, Chapel Hill, NC 27599-3410 Focus The purpose of the Duncan's Bookstore case is to show the relationship between real property valuation and business valuation. Duncan's building and lot, valued at $100,000, are currently used as a bookstore. But his business is less valuable than his real estate. The challenge of the case is to value the business objectively and realize that it does not represent the most profitable use of the site. Setting This case involves the sale of a retail business that includes a 3,500 sq.ft. building on a 6,000 sq.ft. lot. The current owner of Duncan's Bookstore has decided to sell his business and retire. The owners of Stewart's Bookstore are motivated buyers. Exhibits Exhibits include 1994 financial statements for Duncan's Bookstore and Stewart's Bookstore. Availability This case and teaching notes are available for $1.50 for at least 10 copies (plus shipping). Call the author at 919-962-4759 to order copies. Teaching Notes The teaching notes suggest procedures for using the case. They summarize the situation, present valuations of the business and the real estate, suggest appropriate bargaining positions for the buyers and the seller, and explain the error that most students will make in resolving the case. The owners of Stewart's Bookstore, Dave Stewart and Joe Hannah, were discussing their impressions of Duncan's Bookstore, the business they were interested in buying. They had met with Nate Duncan, the current owner, on several occasions, had inspected his facility, and had talked with walk-in customers and several of his university accounts. Duncan had described the recent history of his business and had given them the most current annual financial statements (see Exhibit 1). Stewart and Hannah needed to decide whether to offer to buy Duncan's existing business or any specific assets that Duncan owned. They were motivated buyers because they were interested in expanding their business and were sure that Duncan could find other qualified buyers in the near future. Duncan's Bookstore and Stewart's Bookstore were comparable retail operations, each operated from one location in the same metropolitan area. Duncan's business was housed in a 3,500 sq. ft. building on a 6,000 sq. ft. lot. The property was located in the central city about 2 1/2 miles from Stewart's suburban location. Duncan's neighborhood situated on the fringe of downtown was undergoing transition. For many years, small, locally owned and operated retail businesses had dominated the area. On-street parking and several conveniently located parking lots had adequately accommodated the customers. The residential population, which consisted of university students and middle- to lower-income young families, had been gradually declining for some time. The area was experiencing moderate but sustained development pressure from the nearby university and from government and financial institutions in the core area. …