BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 1 The Chartered Institution of Taxation 2006 Spring Conference Queen’s College Cambridge Jenny Nelder BA FCA FTII Bruce Sutherland & Co HOW TO VALUE GOODWILL AND OTHER INTANGIBLES

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 2 Summary of Topics The animals Valuation Principles What is the value?

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 3 Goodwill “It is a thing very easy to describe, very difficult to define”

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 4 Valuation for MBO Budget Forecast Y/E a 200b 200c 200d 200e Aug 200e Turnover14,00017,00021,00023,000 Gross Profit 4,500 5,300 6,450 7,800 Profit before Tax ,000 1,200 Adjusted profit before tax ,200 1,400 1,480 Outlook good – maintainable £1.5 million profit before tax Multiple Value of Company£8.25m - £9m Net Asset Value£3.6m Goodwill£4.65m - £5.4m

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 5 Unincorporated business – one partner buying out the other partner on the latter’s retirement F’cast Y/E a 200b 200c 200d 200e Profits In this case, due to uncertainty re future and flat profit profile, used average of last three years’ profits

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 6 continued: Maintainable profits£187,000 Less: charge for commercial remuneration for the two partners 80,000 _______ Adjusted maintainable profit£107,000 ======= Multiple of 3 applied Value of business£321,000 Net Asset Value (3,000) _______ Goodwill£318,000 =======

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 7 Location

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 8 Personal

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 9 Casual

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 10 Convenience

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 11 Free Goodwill

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 12 Goodwill Personal Inherent Free – free and adherent

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 13 Intangibles Copyrights Patents Trademarks Designs Know-how

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 14 Intangibles – Bases of Valuation Cost Open market value Income Relief from royalty method Elimination method – cross check

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 15 Valuation Rule Value is “the price which the property might reasonably be expected to fetch if sold in the open market on that day.”

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 16 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

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 17 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

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 18 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

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 19 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

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 20 Example 4 Net Assets used in business£350,000 Adjusted Profits£240,000 Multiple of Value of Whole£720,000 - £960,000 Value of Goodwill£370,000 - £610,000

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 21 Why is this new? Nil rate Corporation Tax No stamp duty on goodwill 10% CGT “Tax free” loan account

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 22 What is Personal Goodwill?

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 23 What is adherent goodwill?

BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 24 Franchises Goodwill = Personal or Belongs to franchisor Not available for roll over? BUT Balloon Promotions Ltd v Wilson (HMIT) (Sp C 524)