1. 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

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

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

4. BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 4 Valuation for MBO Budget Forecast Y/E 31.12 200a 200b 200c 200d 200e Aug 200e Turnover14,00017,00021,00023,000 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 Multiple5.5 - 6 Value of Company£8.25m - £9m Net Asset Value£3.6m Goodwill£4.65m - £5.4m

5. 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 30.9200a 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

6. 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 =======

7. BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 7 Location

8. BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 8 Personal

9. BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 9 Casual

10. BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 10 Convenience

11. BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 11 Free Goodwill

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

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

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

15. 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.”

16. 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

17. 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

18. 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

19. 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

20. BRUCE SUTHERLAND & CO - SHARE VALUATION SPECIALISTS 20 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

21. 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

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

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

24. 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)