Compulsory purchase business compensation – case studies
Compulsory Purchase and Compensation – Business Extinguishment
Major UK infrastructure projects require compensation for compulsory purchase of land and businesses
The team have acted as expert advisors on over 50 compulsory purchase compensation claims. We have also advised and helped clients negotiate compensation and sale prior to compulsory purchase.
Almost all our cases have settled by negotiation or at mediation, thereby saving time and professional costs. Charles Lazarevic is one of the few forensic accountants to have presented oral evidence before the Lands Tribunal. He has given evidence in two significant business extinguishment cases before the Lands Tribunal, including the most recent case to have been decided by the Tribunal. These are presented as case Studies below.
These illustrate important lessons for professionals and their clients engaged in agreeing compensation for business extinguishment following compulsory purchase.
Case Study – Compulsory Purchase and Compensation – Waste and recycling business
The claim arose following the extinguishment of a waste transfer, skip hire and recycling business alongside a railway line. Most heads of claim were agreed between the experts before the hearing, including the figure for pre-possession shadow losses of £610,206, if these losses could be proved, and the EBITDA figure for maintainable earnings of £1.1 million with an additional £0.2 million if there were shadow losses. The Tribunal was asked to opine only on: (1) whether the business had suffered pre-possession losses of £610,206, which would have also increased the agreed annual earnings figure by £0.2 million, and (2) the appropriate multiplier to apply to the earnings figure.
The case was heard over 6 days before Her Honour Judge Alice Robinson and Mr A J Trott FRICS.
The Lands Tribunal heard witness evidence and oral evidence from 4 expert witnesses: 2 waste management and 2 business valuers, including our founder. The key facts and the outcome are set out below:
The claim for pre-possession losses
The evidence of shadow losses was rejected and so the claim for £610,206 and the higher EBITDA of £1.3 million were dismissed.
Extent of recycling?
Whether the business had significant recycling in addition to being a waste transfer and skip business, as this affected which companies could guide the choice of multiplier. While the Tribunal decided that Welcocks would have required greater capital expenditure in the future to conform to recycling regulations, it made no explicit adjustment to the valuation for this and included significant recycling businesses as comparables.
The Claimant’s expert valuer used various quoted and private company transactions in the waste and recycling sector to value the business at just over £10 million (more if pre-possession losses were proved). Our expert focussed on two private company transactions within days of the possession date that he and the waste expert regarded as comparable and valued the Claimant’s business at £3.7 million after various deductions.
While the Tribunal accepted that comparable transactions close to the valuation date capture the contemporary industry context better than ones which took place years before, it decided to include two earlier private company transactions that had significant recycling infrastructure albeit with a slightly lower weighting. Including these earlier transactions increased the multiplier by 72% to 7.4 and resolved most of the difference between the expert valuers’ multipliers.
When deciding between conflicting comparable businesses, in order to favour one transaction over another, the Tribunal opined that evidence would be required from those with personal knowledge. This decision sets a new benchmark for the strength of evidence required to justify the choice of comparable businesses in future.
Also, in certain circumstances the Tribunal is willing to place significant weight on transactions up to three years prior to the valuation date.
The second case concerns a dispute that was heard by the Lands Tribunal in 2006, soon after the first example of forensic accountants rather than surveyors presenting expert evidence on the value of the extinguished business.
The claim arose following the extinguishment of “Contraband Discount Stores”, a discount retailer in Liverpool in 2004. In 2005 for the first time the Lands Tribunal received expert evidence on the value of an extinguished retail store, Optical Express, in Birmingham from forensic accountants rather than surveyors. This resulted in a higher value for the extinguished business based on market multipliers using EBITDA rather than the surveyors’ Years Purchase approach. Contraband had many similarities to Optical Express and so expert evidence was sought from forensic accountants again. Contraband appointed our founder to quantify the value of the business and other losses.
Case Study – Business valuation – discount retailer
The Acquiring Authority and their Expert accountant, employed by a leading firm, were adamant that there was no loss of goodwill arising from the extinguishment, and that pre-possession loss of profit were £10,000, a position they maintained throughout. Their expert was prepared to concede that pre-possession losses were £35,053 (the Tribunal decided these figures should be much higher) and and agreed our expert’s figure for post-possession losses at £121,597.
Our expert report set out a detailed analysis of the trading performance of the store over the previous five years to support the basis of valuation and that pre-possession losses had started earlier than the opposing expert suggested. This analysis helped in the assessment of the appropriate valuation multiplier.
The experts were able to agree the business’s margin at 36.3% and post-possession losses , and the net maintainable profits before tax, which meant the discussion focussed on the multiplier, loss of pre- and post possession revenue and the proceeds of sales. The experts agreed to use price-earnings ratios were more appropriate rather than EBITDA.
Basis of valuation
The Council’s expert used the most recent accounts and applied a multiplier of 2.6 based on asking prices in online classified ads and deducted the value of the lease and proceeds. Both the approach to the multiplier and deduction of the lease value were rejected by the Tribunal. In contrast, our expert looked for a variety of sources for the multiplier. It proved difficult to find evidence of comparable discount retail stores bought or sold as most are privately owned. As an alternative our expert looked at publicly traded retail companies and make appropriate adjustments (see below). His report described the activities and trading performance of each company. This led to a short list of relevant companies for the valuation, which he used to arrive at an average price earnings (P/E) ratio. The Tribunal decided the multiplier should be based only on the listed discount retailers’ P/Es.
The Tribunal applied our expert’s illiquidity discount of 35% to reflect differences between Contraband and the listed discount stores sector.
The Tribunal decided that a control premium of 20% should be used, only slightly higher than the 15% used in Optical Express to reflect that Contraband was a local concern, rather than suffering the constraint of being part of a national chain.
The trading history showed consistent growth in revenue and profits over the 5 years presented in line with the growth in listed companies. This allowed listed company P/E ratios to be used as a basis for valuation in the absence of comparable private company transactions.
Proceeds of sale of business assets
These are usually deducted in arriving at the compensation as these assets usually retained by the business on sale but realised on extinguishment. The Tribunal used our expert’s net asset figure from the closing accounts.
These two case studies demonstrate the specialist nature of these compensation calculations and the need to consult experienced specialists when confronted with a compulsory purchase business extinguishment compensation claim.
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