Relationship between Real Estate Appraisal Methodologies and Business Valuation Approaches: A Case Study of Deloitte Kenya

Abstract

More often than not, business valuers face the challenge of valuing businesses with substantial real estate investments. With the bringing onboard of real estate appraisers, the cost of valuation tends to skyrocket and disadvantaging the clients. The current study study attempted to bridge the literature gap by trying to establish if there is any relationship between real estate appraisal methodologies and business valuation approaches. The research objectives included; to determine the effect of residual methodology on business valuation adopted by Deloitte Kenya, to find out the influence of profit methodology on business valuation approaches adopted by Deloitte Kenya and to establish the effect of cost methodology on business valuation approaches adopted by Deloitte Kenya. Valuer’s competence acted as the intervening variable in assessing fair or market values by business valuers at Deloitte Kenya. Theories that underpinned this study were real options, economic rent and Austrian theory of value. Descriptive survey and correlational research designs were utilized. The target population consisted of 52 business valuers at Deloitte Kenya, and census approach used to collect data from the target population. Data for this study was obtained from primary sources and collected using questionnaires. The questionnaires were pretested at 30% of the target population, which involved 12 business valuers from Baker Tilly. The data collected was analyzed using descriptive statistics by utilizing percentages, frequencies, mean and standard deviation. Inferential statistics encompassed both correlation and regression analysis. Tools like Microsoft Excel, 2019 together with Stata version 15.0 were helpful in the analysis. Reliability of the data was evaluated using Cronbach’s alpha coefficient in measuring consistency of the variables under study; while the validity of the data was assessed through content and construct validity. The study findings depicted that profit and cost methodologies have an influence in the valuation approaches adopted by business valuers at Deloitte Kenya, with correlation coefficient values of (r=0.623, p value=0.00) and (r=0.459, p value=0.004) respectively. This showed that the two methodologies were positively and statistically significant in influencing business valuation approaches adopted by Deloitte Kenya. Even though residual methodology also registered positive and significant influence on business valuation approaches, most respondents disagreed about this influence. The study recommended that competence of business valuers involved in valuation of businesses with significant real estate investments can be enhanced through short training programs; while academicians and policy makers should collaborate to infuse the use of AI and ESG reporting on Kenyan valuation standards.