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Food Law Blog
Opinions and insights from our Food and Drink team
The recent (6 March 2019) High Court decision of Green Deal Marketing Southern Limited v Economy Energy Trading Limited and Others has a number of interesting facets, but arguably its greatest contribution is in relation to the question of how to value an agency (in this case, Green Deal) with regard to a claim for compensation under Regulation 17 as a result of Green Deal’s agency coming to an end.
The experts for each party agreed that an earnings-based valuation should be adopted. Accordingly, each provided a valuation by applying a multiplier to a multiplicand (representing a sustainable annual profit).
The experts both agreed that it was necessary to discount against publicly available multiples that would be relevant to listed companies in order to reflect, amongst other things, the smaller size of Green Deal and the lack of marketability for its shares.
Notwithstanding that initial agreement, the experts (to put it mildly) disagreed on a whole raft of other issues, as the two valuations came out at £8m and £1m respectively. The judge greatly preferred the latter valuation and it is interesting to note the factors that underpinned that valuation.
The judge preferred the defendant’s expert’s method of valuation which was based on an EV/EBITDA (EV being the Enterprise Value and EBITDA being the Earnings Before Interest, Tax, Depreciation and Amortisation). The claimant’s expert relied on a price/earnings ratio and said that in 31 years of preparing valuations of businesses he had never used the EV/EBITDA method.
The judge said he preferred the EV/EBITDA method for two reasons.
In the judge’s opinion it was appropriate to start with a multiple of four. The judge then revaluated the three discounts given by the defendant’s expert and decided:
The judge therefore decided that the multiplier should be 1.6.
The judge then considered the multiplicand.
He accepted the defendant’s expert’s view (again) as to:
The judge therefore set the multiplicand at £656,000. With a multiplier of 1.6 this resulted in compensation under regulation of £1,049,600.
This case is useful in that it sets out a practical, logical approach to the valuation of compensation under the Commercial Agency Regulations with regard to private companies and certainly one of this size.
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