BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 1

The Chartered Institution of Taxation2006 Spring Conference

Queen’s College Cambridge

Jenny Nelder BA FCA FTIIBruce Sutherland & Co

HOW TO VALUE GOODWILL

AND OTHER INTANGIBLES

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Summary of Topics

• The animals

• Valuation Principles

• What is the value?

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Goodwill

“It is a thing very easy to describe, very difficult to define”

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Valuation for MBO Budget Forecast

Y/E 31.12 200a 200b 200c 200d 200e Aug 200e

Turnover 14,000 17,000 21,000 23,000

Gross Profit 4,500 5,300 6,450 7,800

Profit before Tax 300 440 1,000 1,200

Adjusted profit before tax 290 420 940 1,200 1,400 1,480

Outlook good – maintainable £1.5 million profit before tax

Multiple 5.5 - 6

Value of Company £8.25m - £9m

Net Asset Value £3.6m

Goodwill £4.65m - £5.4m

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Unincorporated business – one partner buying out the other partner on the latter’s retirement

F’cast

Y/E 30.9 200a 200b 200c 200d 200e

Profits 150 180 170 200 190

In this case, due to uncertainty re future and flat profit profile, used average of last three years’ profits

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continued:Maintainable profits £187,000Less: charge for commercial remuneration for the two partners 80,000 _______Adjusted maintainable profit £107,000

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Multiple of 3 applied

Value of business £321,000Net Asset Value (3,000)

_______Goodwill £318,000

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Location

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Personal

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Casual

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Convenience

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Free Goodwill

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Goodwill

• Personal

• Inherent

• Free – free and adherent

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Intangibles

Copyrights

Patents

Trademarks

Designs

Know-how

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Intangibles – Bases of Valuation

Cost

Open market value

Income

Relief from royalty method

Elimination method – cross check

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Valuation Rule

Value is

“the price which the property might reasonably be expected to fetch if sold in the open market on that day.”

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Case Law• Imaginary sale

• In a market where all are present

• Prudent purchaser

• Seller seeks best price

• Must sell on relevant date

• No hindsight

• Special purchaser

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Example 1

Net Assets used in business £35,000

Adjusted Profits £40,000

Multiple of 4 x 4

Value of Whole £160,000

Value of Goodwill £125,000

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Example 2

Net Liabilities £(75,000)

Adjusted Profits £59,000

Multiple, at least 3 x 3

Value of Whole £177,000

Value of Goodwill £252,000

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Example 3

Net Assets £30,000

Adjusted Profits £30,000

Multiple of 2 x 2

Value of Whole £60,000

Value of Goodwill £30,000

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Example 4

Net Assets used in business £350,000

Adjusted Profits £240,000

Multiple of 3 - 4

Value of Whole £720,000 - £960,000

Value of Goodwill £370,000 - £610,000

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Why is this new?

Nil rate Corporation Tax

No stamp duty on goodwill

10% CGT

“Tax free” loan account

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What is Personal Goodwill?

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What is adherent goodwill?

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Franchises

Goodwill = Personalor Belongs to franchisor

Not available for roll over?

BUT

Balloon Promotions Ltd v Wilson (HMIT) (Sp C 524)