DETERMINANTS OF ASSET VALUATION APPROACHES IN ACQUISITION OF FRANCHISED PETROL FILLING STATIONS IN NAKURU COUNTY

Abstract

Acquisitions have become a big part of the corporate world, and are among the most strategic and tactical decisions made by companies. Therefore, asset valuation is gaining prominence within the investment sector. However, the key question that remains to be addressed is how do these valuation factors affect the acquisition of business assets such as petrol filling stations majority of which are still franchises. Therefore, general objective of the study was to investigate the asset valuation factors affecting acquisition of franchised petrol filling stations in Nakuru County. The specific objectives were to determine the influence of sales comparison approach, income approach, and cost approach on the acquisition of franchised petrol filling stations in Nakuru County. The theory of asset pricing, accounting theory and neoclassical theory was used to explain into detail on asset valuation factors and how they affect acquisition. The study used a descriptive survey research design targeting 98 recently acquired and operating franchised petrol filling stations in Nakuru County. From these, the accessible population comprised the investors, the owners of the petrol stations, the management of the petrol stations and asset valuers in the region. Stratified random sampling was used to select a sample size of 130 respondents. Data was collected using questionnaire and analyzed using both descriptive and inferential statistical methods. The study established that the acquiring firms often assess the value of comparable properties when making a petrol station acquisition and the firms consider the transaction dates when the comparable property was sold or leased. However, with regards to property size, the firms factor in the size of the comparable property with respect to the new property before acquiring the same. Besides, it emerged that the acquiring firm considers the location and physical characteristics of the comparable properties, a number of the participants remained neutral while others expressed contrary opinion. The findings of the study further indicated that the firm considers the potential annual gross income from the property before acquisition and that it considers the net operating income from the targeted property. In addition, it emerged that the estimated capitalization rate from the target property and the expected growth rate of the property remain critical in the process of valuation and acquisition of franchised petrol filling stations. It also came out that the acquiring firm takes into account the growth rate of the property income. The study revealed that the acquiring entities greatly consider the cost of the vacant land and the cost of developing structures before making a petrol station acquisition. It further showed that the replacement cost of the structure cannot be ignore before making a petrol station acquisition and that the firm considers the purpose of the structure before making a petrol station acquisition. Besides, the study showed that the time over which the structure has been existing in order to decide on asset acquisition. Besides, the purpose of the structure as a significant determinant of franchised petrol station acquisition. The study recommended the necessity to consider the comparison of sales in relation to the expected performance of the acquiring entity should it consider it fit to make an acquisition. This study also recommended that in full consideration of the perpetual life a business expects to enjoy and the expected costs should as well be considered in relation to the expected useful life of the franchised business entity.