Solving the Problems of the Carrier
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How the Value of the Assets of a Haulage Business may be Considerably Depreciated if Goodwill be Lacking
IT has been suggested to me that I should explain, in greater detail, the point which I had commenced to make at the conclusion of the previous article. I was leading up to a demonstration of the way in which the value of the assets of a haulage business—especially the vehicles—could be affected by that of the goodwill of the business itself. I can best comply with this request by giving figures relating to the example I had in mind.
There were four vehicles, which I shall call A, B, C and D. Each was engaged upon an annual contract for the conveyance of a material for which the demand was much greater for six months of the year than during the remainder. Roughly speaking, it Was fair to assume that the tonnage carted during six months would be double that hauled during the remaining period.
The proprietor of the business was able to give me figures for expenditure and revenue covering only three months, during the busy season. His debit items were • as follow :—Petrol, oil, wages and national insurances, Road Fund tax, vehicle insurance, garage and depreci ation. On the credit side were entered the amounts received for cartage. The difference between these two was assumed to be net profit.
An Erroneous Idea of Profit.
According to him, the business showed, during the three months for which figures were available, net profits as follow :—Vehicle A, £31 5s.; vehicle B, £28 5s.; vehicle C, £12; vehicle D, £20 10s. ; total, £92. Assuming that the same profit was earned in the other three months of the busy part of the year, and that for the rest of the same year profits were halved, the total profit would be £276.
Actually, this assumption considerably favoured the proprietor, because some of the items of expense would not be reduced, although the volume of business was less. The taxation, the garage and the cost of insurance, for example, would be the same during the slack period as in the busy months. Wages were assumed to be reduced in proportion, as the men were paid on the basis of Tonnage. There was actually a fallacy there, too.
The purchaser, at any rate, was generous, for he not
only agreed that the profits for the slack period of the year could be talFen as above suggested, but he also accepted the total, namely, £276 per annum, as being the basis for calculation of the value of the goodwill. This clearly was stretching a point, because figures were not available for more than three months and the business. itself had not been established for a full year. At the same time, he took a wise precaution of offering only three years' purchase, which made the goodwill £828.
Four Vehicles the Only Assets.
The four vehicles named were the only assets. They were all old and on one of them there was still a balance of hire-purchase payments due. Nevertheless, prior to investigating the figures for goodwill, it seemed to me that the proprietor was justified in anticipating that he would -be able to make them do three years' work—at least that expectation applied to three of them. It should be noted that the mileage was not great.
Vehicle A had cost £78. It had been in use nelrlya year, and I assessed the depreciation at £24, leaving the present value at £54. Vehicle B had been purchased for £85 at about the same time and i assessed its present value at £58. Vehicle C was the poorest and I was of the opinion that it should be disposed of as soon as reasonably possible ; I, therefore, assessed it at £20. That was more than its market value, if offered 'for direct sale, but I deemed it quite likely that an allowance of £20 would be obtainable for it in part exchange for a new one, or for a second-hand one of reasonably good quality. The fourth vehicle bad cost £156, and, on the basis of the first and second, I assessed it at £108.
The total value of the four is thus seen to be £240. From that sum, however, it was necessary to deduct the £80 still owing on the hire-purchase agreement on vehicle D, which reduced the net value of the assets to £160. On the face of it, therefore, the business was worth £988.
The observant reader will, however, have noticed that in the above statement of debit items there are serious omissions—those to which I have already
referred in the previous article. In the first place, considering the cost of operation only of the vehicles, there is no mention of expenditure on tyres and nothing relating to maintenance or repairs.
There is no suggestion that the proprietor, in preparing his accounts for my inspection, had deliberately omitted these with intent to deceive. I gathered that, during the period under review, there had been no expenditure on repairs, nothing had been spent on tyres, and, as for those maintenance operations, such as wash ing, polishing, greasing, adjustments and the like, they had been carried out by the drivers as part of their normal duties. Obviously, however„ this was a state of affairs which could not be assumed to continue indefinitely. Moreover, in view of the age of the vehicles, it was more than likely that the cost of maintenance, averaged over a three-years' life, which I was giving to three of the four vehicles, might prove to be considerable.
At any rate, I came to the conclusion that an allowance. of £40 per annum per vehicle was the minimum which should be made to cover the two items, tyres and maintenance. That meant a reduction in the net profits by that amount, bringing the total from £276
per annum to £116 per annum.
It will also be clear to those who habitually read these articles that there is no provision for establishment charges. Now obviously the man in charge, although he was, in actual fact, the proprietor of the business, would require a wage as such. At the least, £100 per annum should be debited to that account.
In addition, as I pointed out in the previous article, there must be some provision for a contingency fund to meet the expense of substitute vehicles when one or other of the four was out of commission. A minimum of at• least £50 should be set aside for this purpose.
Clearly, therefore, instead of a profit of £276 per annum, the business was being run at a loss of £34 per annum. The contracts were worse than valueless. Without the contracts there was no work for the vehicles, for there were no licences available to operate them.
Their value as assets, therefore, could be calculated only on the basis of what they would fetch in the open market, and I could not imagine anyone paying £50 for the four. The business, instead of being worth £088 could be valued, therefore, at only the low figure of £50:
I have referred above to the question of wages. In fact, the wages paid to the drivers of these vehicles were considerably below the minimum which would be insisted upon, I imagine, by the Licensing Authority when next the licences came up for renewal. That applied to the wages which the men earned during the busy period. In the slack season, their wages, which, as I pointed out above, were based on tonnage carted, would be totally inadequate. If, therefore, this factor be taken into consideration, the lack of goodwill in the business is still further emphasized. S.T.R.