Agency compensation: do £20k agencies have any value?

by Thom Vaughan of E.A.D. Solicitors L.L.P. and Adrian Pym of RSM Tenon

In the 2007 case of Lonsdale the House
of Lords confirmed that in calculating
the compensation payable to a
commercial agent on termination or
expiry of its agency under the
Commercial Agents (Council Directive)
Regulations 1993, the court should
award the value of the agency business
at the date of termination.
In some quarters this was seen as a bitter blow for
commercial agents who had previously enjoyed
sending written demands for the equivalent of 2
years commission following termination of their
agencies.
Lonsdale changed all of that and in the intervening
period a trend is beginning to emerge, which
broadly suggests that high value agencies with, say,
gross commission income of £50,000 and above
continue to result in lucrative payments (in some
cases more than pre-Lonsdale) whereas the run of
the mill £20,000 agencies are facing real difficulties
when it comes to demonstrating they have a value
which results in any compensation.
One reason for this can be attributed to a line in
Lonsdale, which reads, “If the agent would have had
to incur expense or do work in earning his
commission, it cannot be assumed that the
hypothetical purchaser would have earned it gross
or without having to do anything.” Effectively the
court appears to indicate that a notional
employment cost should be taken into account.
In practice what has followed is that when valuing
agencies some experts have indeed deducted a
notional employment cost of the agent and this is
further supported by the later High Court case of
Fryer –v- Firth (2008), which states,
“£14,100 per annum for an average 40 hour week is
on any view a modest salary and is very much less
than the 2005 New Earnings Survey figure for sales
representatives which produced average earnings
of £521.70 per week gross, £27,128 per annum.
Almost anyone could obtain an income at that level
in an unskilled job without paying a premium for it.
No hypothetical purchaser would in my opinion be
willing to pay a substantial sum for the opportunity
of earning that amount through his own labour
unless the prospects of increasing the return for
approximately the same amount of effort were
considerable.”
The deduction of a notional employment cost in
cases involving the smaller agency may result in only
a small profit or even no remaining profit, as in the
case of Fryer.
Experts will value a commercial agency on the basis
of a multiple of annual profits after the notional
employment cost of the agent, an approach
common to the valuation of any business. The
assessment of the multiple is very subjective. In the
case of non-agency businesses the multiple is
normally based on those achieved in sales of similar
businesses. In the case of commercial agencies
there is no real market for the sale or purchase of
agencies so the expert is faced with a lack of
comparables.

The multiple is a measure of the risk of investing in a
business. As a general rule a strong business with
good prospects for growth or continued strong
profits will attract a higher multiple as the risk to the
hypothetical purchaser is lower. A weaker agency
with declining profits will be perceived as a greater
investment risk and therefore carry a lower multiple.
This was recognised in Lonsdale which stated “if the
market for the products in which the agent dealt was
rising or declining, this would have affected what a
hypothetical purchaser would have been willing to
give. He would have paid fewer years’ purchase for a
declining agency than for one in an expanding
market.”
Therefore unless an agent is able to show that his
£20k agency requires only a small amount of work
(perhaps it is one of many agencies he carries) or he
can show that he expected it to grow rapidly (with
evidence in support) then he faces an uphill struggle
to demonstrate that it has any value to a
hypothetical purchaser, and therefore recover a
worthwhile amount of compensation.
As an Agent, one really has to ask if this fits in with
the intention of the European Council’s Directive
and the grand aim of protecting the “downtrodden
race” of agents. However, it appears that this is
where we are post – Lonsdale: social and equitable
principles have given way to strictly commercial
principles.
As a Principal, perhaps you would like agents to ask
themselves what they would pay for a £20k agency
taking into account their expense overheads and
hours worked and then compare this to what they
are seeking as compensation. This is an eminently
sensible starting point and will force the parties to
get to grips with the valuation process both
practically and conceptually.

Adrian Pym is Director of

Forensic Accounting for business valuation experts RSM Tenon

Head Office: Charterhouse,
Legge Street, Birmingham B4 7EU
Tel: 0121 333 3100
www.rsmtenon.com

Thom Vaughan is a solicitor with

E.A.D Solicitors LLP and specialises

in commercial agency matters.

Head Office: Prospect House,
Columbus Quay, Liverpool L3 4DB
Tel: 0151 735 1000
www.eadsolicitors.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, E.A.D. Solicitors, RSM Tenon and the writer accept no liability in connection with the general guidance given in this column.

 

 

 

Download PDF