THE HAULIERS' INQUIRE WITHIN.
Page 13
If you've noticed an error in this article please click here to report it so we can fix it.
A Reply is Here Given to a Request for Advice and Guidance in Connection with Buying a Share in a Haulier's Business.
QI./ERY No. 213. A gentleman who prefers to be known as "Sammy," asks the following question: On what basis does a third party enter a small haulage business, which was started six months ago by two partners ? The said business consists of a 1-ton Ford lorry (1921 model, right-hand drive) and a connection—round of customers—for which altogether 2250 was paid by the two partners, who took equal shares. They have made a profit of 225 in the six months, allowing 225 for depreciation. At the present time, in order to meet competition and to cater for the increased trade which is corning along, it is desired to acquire a larger wagon, for which purpose more capital is required. As the present partners have none, they are inviting the co-operation of "Sammy," hence the question. it is added that the Ford is now valued at £80; and the new vehicle is to cost 2470 and will have a capacity of 30 cwt. There are several factors, not disclosed in the inquiry, which have an important bearing on the matter, and which will materially affect the reply to this correspondent's question. Presuming, in the first place, that the whole of the material assets of the company are comprised in the Ford lorry, and that the figure of 225 for depreciation refers to this, then I want to know whether the present value of the Ford, quoted as being £80, is arrived at after deducting the £25, or whether that value is independent of-the depreciation amount mentioned. If the value quoted is after deduction of the 225, then I can assume that the actual profit is 250, and not 225, as stated. If the 225 has to come off that 280, then the actual profit is only 225. I shall in any case assume that the initial value of the Ford tanner was 2105.
-Then I want to know whether the 250, or 225, as the case may be, is gross profit or net. That is to say, I want to knowwhether this is all that the two partners have made out of the business, or whether, as working members of the .firm, which I presume they are, they have, in addition, received wages as drivers, managers, directors, or whatever they may call themselves. If the profit namedis the gross profit, and if this 250 (or 225) is all that they have to show for their SIX months' work, then the proper advice to my correspondent is easy, and may quickly be given. It is : Don't have anything to do with the business at all. if it is a net profit, calculated after all wages of any kind have been paid, then the matter resolves itself into a problem which permits of two answers, according to the answer, to the first of my queries ; that is to say, according to whether the Ford has been depre ciated independently of the,225.named or not. '
How to Calculate the Value of a Business.
Taking it first of all that the 225 has been taken off in arriving at the value of the Ford, and that there was really only 225 profit in the six months, then we may assume that the annual profit is going to be 250. Now, the selling value of a business of this kind is made up of the value of the actual property, in this case, consisting or a Ford van which, we are told, is worth 280, together with what is called the goodwill of the concern, which is the same as what our correspondent calls the connection, or the round of customers. The latter does not command, in the market, anything like so much as our friend apparently thinks. 'Before the war, the customary
• value of capitalized value of goodwill was based on what is called a three years' purchase ; this is to say, the value, , at any time, is the net profit which the business shows for three years, or, where it has not been in existence for so long, then the profit which it would earn in three years supposing it continues to go on as it has been doing all the time it has been in existence. In this case, then, the value-of. the goodwill is three times 250, which we have shown is the annual profit. The total value of. the business today, therefore, on the basis we are considering is 2150 for goodwill, plus 280 for the vehicle total £230. As a matter of fact, however, since the war, owing to the facility with which money can be lent at 5iper cent. and thereabouts, the capitalized value of goodwill is rarely taken as 'being more than the equivalent of two ,years' profit, which would reduce the total value, in this case, to 2180. There is, however, no hard-and-fast line, and it will be quite fair to split the difference, approximately, and call its present selling price, including the lorry, £210. In those circumstances " Sammy " should go in for a contribution of 2105.
If, on the other hand, the value of the Ford-80has been . arrived at, as I think is actually the case, independently of the depreciation allowance of 225, and if the present owners of the business have 250 to show, as well as the lorry, then apparently the net profit per annum is 2100, and the value on a three years' purchase is 2300, plus 280 for the lorry," and £200 on. a two 1;-ears' purchase, again plus the 280 for the Ford. Splitting the difference again, and calling the total 2330, then our correspondent: must pay 2185 as his share on going in The business in the beginning was' either worth 2235 or 2355, according as the :depreciation on the Ford is included in the 280 or not, but hi any case it does not appear to have been a bad bargain. If there has actually been a profit of 250 net during the six months, apart from depreciation, then it was bought cheaply
Two Small Vehicles or One Large One ?
There is another point arising out of this inquiry, one which is not actually raised by the inquirer, but which might profitably be considered by him and by his two prospective partners, and that is, whether it is going to be better to buy a 30-cwt. machine at .2470, or indeed at any price, or another 1-tonner at g105, i
again at any price n reason. The inquiry specifically mentions the fact that the two now in the business are "working!' partners, which means, I take it, that they are both of them actually engaged in the business: neither of them is a sleeping partner. It would seem., therefore, that both of them drive in turn,' or, maybe one looks after the office end of the business and .t& other. drives. In any case, the addition of another man would probably be the best -thing.
Now, with two 1-ton vans a much better 'dividend can be earned, in many cases, than with a 30-cwt. machine. Two clients can he served at once with the two vehicles, whilst, when 30 cwt. of load offers, from one, the two can generally carry it at very little more Cost than the one larger machine. I may mention that I came across a case only the 'other day of a haulier who owned a 4-tanner and a 1-tonner. He told me that the 1-tonner earned enough to keep the other. He was able to keep the 1-tonner on the road all day long, every day, with a, paying toad, whilst often enough he had the large machine doing nothing. Only in the case of loads which could not be made up in ton lots did he try to use the large machine. It may be that this is a special case, but, then, so also may be that, of this correspondent, and I am certainly safe in making the suggestion that, he considers this point carefully
before buying a larger 'machine. THE SKOTCH.