by Thom Vaughan of E.A.D. Solicitors L.L.P.
and Adrian Pym or Prime Forensic Accountants
In the oft quoted case of Lonsdale -v-
Howard & Hallam Ltd , Lord
Hoffman optimistically suggested that
“once it is firmly understood that the
compensation is for the loss of the value
of the agency, relatively few cases will go
to court … small comparable businesses
are bought and sold every day and it
should not be difficult for the parties,
with the benefit of advice about the
going rate for such businesses, to agree
on an appropriate valuation.”
The reality has been somewhat different and this note
seeks to make some helpful observations on the way in
which the “going rate” for these curious, hypothetical
agency businesses should properly be valued.
The case of Camm -v- Seac is a fine example of the
radically different valuations given by parties’
accountants and the reaction of the High Court Judge
HHJ Behrens QC who ignores both. In this case the
agent accrued average gross commissions of £50k per
annum. The agent’s expert said that the agency must
surely be worth between £145k and £200k using a
multiple of 5 – 7. The principal’s expert was having none
of this and suggested it would fetch no more than a
nominal sum. Judge Behrens allowed £35k for
compensation without really appearing to engage in
the valuation process on the face it.
So how is an agent or principal supposed to
gauge the value of a compensation payment?
In the first hearing in the lower courts the Judge in the
Lonsdale case said, “If it is kept in mind that the damage
for which the agent is to be compensated consists in
the loss of the value or goodwill he can be said to have
possessed in the agency, then it can be seen that
valuation ought to be reasonably straightforward.”
However, no evidence was put before the Court on the
value of commercial goodwill.
The most commonly adopted definition of goodwill is
“the benefit and advantage of the good name,
reputation, and connection of the business. It is the
attractive force which brings in custom. It is the one
thing which distinguishes an old established business
from a new business at its first start.”
In simple terms Goodwill is the amount by which the
value of the entire business exceeds the value of its net
tangible assets. In valuation terms goodwill can be
identified as attaching to a business and its products, a
location from which the business trades or to the
individual who operates the business.
In the case of say a manufacturing company the
goodwill might attach to the product manufactured; for
a restaurant business it might attach to the location of
the restaurant. A football player will have a value (their
transfer value) that is entirely personal.
With commercial agents goodwill will attach to the
agent who is “employed” to sell a principal’s product into
their database of customers and contacts (or to go out
and establish a database of customers). The principal is
buying the individual’s sales ability within a commercial
agency relationship. The products being sold are also
likely to have a goodwill element but that is separate
from the goodwill attaching to the agent personally.
The ability to sell the goodwill will obviously be easier
where it relates to a product or location as the owner of
the business is not as relevant. However, in the case of
personal goodwill this cannot be sold for value as it
cannot be transferred at the date of sale.
Therefore with Agents there is an added factor of
personal goodwill that impacts upon the choice of
multiple. Even assuming that the business is saleable
(“standing in the shoes of”) a willing buyer will see the
business as a personal relationship business and identify
the risks that go with such a business. This reduces the
multiple achievable in comparison to a “normal”
business. Also, with say a manufacturing business there
will be value in the underlying assets such as the plant
and machinery used to manufacture the products. A
commercial agent is likely to have minimal tangible
asset backing, and therefore there is little or no security.
A buyer of a manufacturing business will at least have
some assets that can be redeployed on other products,
or sold if the sales fail to continue for the existing
Therefore in the writers’ experience the multiples
commonly adopted in commercial agency cases are
generally in the range of 1 to 3 and ultimately up to 5.
The figure 3 might be applied to those businesses which
show strong sales growth historically and continuing
sales growth potential in the future. Such sales growth
being independent of the agent and related to the
popularity of the brand or product.
For example the recent sales of Pandora jewellery,
which itself featured in a commercial agent
compensation claim. Multiples beyond 3 would suggest
remarkable growth prospects, a very strong product
range and the expectation of real stability / durability.
There is very little case law that provides guidance on
profit multiples, especially in commercial agents cases.
The Pandora jewellery case was not a helpful case on
multiples because of the existence of a distribution
agreement that could be cancelled on 12 months
notice. Given this external risk factor the Judge
awarded compensation based on one year’s earnings,
despite the meteoric rise in sales of Pandora jewellery.
Following cross examination the accountant produced
a revised post tax profit figure of £14,100 and a
valuation of £35,000 to £50,000. This implied a profit
multiple in the range of 2.5 to 3.5. The Judge
commented on the revised valuation range “…but I
regard even this as unrealistic”.
The reason for rejecting the revised valuation was not
specific to the multiplier but related to the net earnings
of £14,100. The Judge commented that “No
hypothetical purchaser would in my opinion be willing
to pay a substantial amount for the opportunity of
earning that amount through his own labours unless the
prospects of increasing the return for approximately
the same amount of effort were considerable”.
In summary the multiples on commercial agents cases
will generally be lower than those experienced on
“normal” companies because of the differences
between the two. Commercial agents compensation
can be viewed as similar to compensation for loss of
employment in that the regulations compensate agents
for a lack of employment rights. They cannot
compensate them for what they could have sold their
agency for as there is no market for agencies in the UK.
Perhaps in assessing damages Judges will still ultimately
refer back to their own instinctive assessment of what
“feels” reasonable as HHJ Behrens appears to have done
in both Camm and McQuillan, leaving lawyers and
accountants shaking their heads. What is clear is that
the idea of parties being able to confidently reach
agreement between themselves will remain a
pipedream until clearer judicial guidance is given.
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Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, E.A.D. Solicitors, Prime Forensic Accountants and the writes accept no liability in connection with the general guidance given in this column.