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Solving the Problems of the Carrier

29th November 1935
Page 40
Page 41
Page 40, 29th November 1935 — Solving the Problems of the Carrier
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Which of the following most accurately describes the problem?

What is the Value of Goodwill?

Some Points to Consider in Selling a Passenger or Goodstransport Business. Operators' Views on the Importance of Goodwill

QtesUESTIONS about the procedure to be adopted when selling a business are occurring again, pecially problems relating to the assessment of goodwill. I had quite a long three-cotnered argumenti with two of my visitor: during the 4Commercial Motor Show. They were both keen business men, both oneman business proprietors and both of them—perhaps one in particular—in such a position that they could not escape considerationr4of this problem.

Curiously enough, one was in the goods-carrying business and the other a public-service-vehicles operator. The first point to be noted is that there was no questioning the business ability of either of these men. Starting, as it were, from zero, they had both, by their own unaided efforts, arrived at positions where, whilstotheir enterprises were not large, they were yet bringing in satisfactory incomes. Each was making a good profit ; neither was finding it necessary to cut rates in order• to obtain business. The haulage contractor in particular had more work than he could do.

To simplify the following description of the three-part conversation, I will call the passenger operator Mr. Passman, and the goods operator Mr. Goodman. It was Mr. Goodman who introduced the subject by saying : "I have had tentative offers to purchase my business and I don't know quite what to do about it."

I should here mention that he had already informed me of his net profits. The total was not far short of £1,000 per annum; I prefer not to give the actual figure.

"The question that comes to my mind, at once," I answered him, " is : what will you do for a living when you have sold your business? It is fairly obvious that you will have to enter into some agreement not to start again in the haulage industry, for a period, in the same area. It is hardly likely that you will be offered a position with a salary commensurate with the profits that you are now making, and whatever you receive on account of the sale will not bear you directly sufficient interest to enable you to retire."

"What do you think I should get for it? " he asked.

"The maximum," I answered, "making allowance for goodwill assessed on the basis of three years' profits and top market value of your vehicles, accessories and equipment, is, say, £2,500. As the money market stands at present, you would have difficulty in investing that sum in any safe stock so as to bring you more than £100 per annum."

" Well, that's neither here nor there," he replied.

Is Goodwill Underrated?

Then Mr. Passman interposed. "That reminds me," he said; " I was going to ask you about the assessment of goodwill. I have read your articles on the subject and it seems to me that goodwill is very much underrated. Surely, if I sell a business, I ought to get, in return for the goodwill, enough to enable me to continue to receive that income if I invest the amount received? "

" That is much too optimistic an estimate," I replied.

" But I don't see it," he objected. " If I sell my business I am selling a man the opportunity Of making the same profit per annum as I have been making. Why shouldn't I be paid accordingly?" " For one thing," I answered, " when you sell a business and include the:goodwill, you are, in the goodwill, selling something which has a purely theoretical value. To a considerable extent, the profit that you have been making has resulted from your own business ability and capacity to make this profit. In selling the business, you are not selling business capacity, and, in order to maintain the profits at that level, the purchaser will have to be able to put into the business, capacity equal to your own.

" To illustrate this More clearly, perhaps, it will help if I refer to the many cases in which a business is purchased and a fair sum given for the goodwill, on the understanding that the vendor also comes in as manager. In those circumstances, he is paid a salary which, added to the investment value of the sum received for the goodwill, comes reasonably close to the profit which has been earned.

" In such cases, the purchaser is obviously imbued with the idea that by taking over this business and

paying the proprietor that salary, he can, with other assets which he himself has available, increase the value of the business. At least, the fact that he is willing to pay for the goodwill and then pay the vendor a salary, does, I think, illustrate my point that, in selling goodwill, one cannot expect to receive an amount which is likely to bear interest enough to provide one with the equivalent of the profits of which disposing."

the proprietor is Here Mr. Goodman butted in again. "Now those are the lines on which 1 had been thinking," he said. " I was wondering whether I could dispose of my business and, at the same time, enter into an agreement so that I could obtain a position with the concern which has been making tentative offers."

" I have already dealt with that point, I think," I answered, "when I suggested to you that it would be unlikely that you would be given a position which would bear a salary satisfactory to you. Further, as I am sure you will appreciate, any agreement, however hard and fast it may seem on paper, is, nevertheless, apt to be somewhat evanescent in actual fact."

" Yes," he replied. "I know something of that. It's always easy to get rid of a man, if you don't want him, without breaking any written agreement."

" There's another point, too," I continued. " It doesn't always follow that a man who can make good on his own is going to be successful as a subordinate in a bigger concern. My advice to you, as you are situated, is to keep your independence."

"But "—this from Mr. Passman—" mine is a pas senger business with an established service. There can be no question that the profits will continue in the future as they have in the past. I still think that in selling my business I ought to be given recompense which will bring me a revenue sufficient to replace what I am losing."

" I am afraid you will be disappointed," I replied. " But I will say this : in the case of an established passenger-service business, there is a tendency to allow a little more for goodwill, especially in these days, when the possession of licences almost confers a monopoly, and, in many cases, the goodwill has been assessed at rather more than the equivalent of profit from two or three years. In fact, in the case of a certain prominent concern which, during the past two years, has purchased the businesses of a considerable number of small passenger-vehicle operators, a goodwill equivalent td five years' assessment of profits has been paid." S.T.R.


People: Goodman
Locations: Goodstransport

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