Commercial Agents Regulations: new guidance on valuing compensation

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.

1. He considered the defendant’s expert to be the more reliable expert and, with regard to methodology: “I think it reasonable to conclude that she is more attuned to up-to-date approaches with business valuation and less reliant on the fact of having learnt a method many years ago and never departed from it”. (!!)
2. Green Deal, although not a listed company, was still significant enough that multiples of listed companies was a relevant exercise if undertaken “with considerable care”.

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:

1. a 50% discount was appropriate, taking into account the risks to Green Deal from the fact that it was solely reliant on Economy Energy Trading Limited for its income stream;
2. the regulatory pressures upon Green Deal were highly relevant to a real-world valuation of its business. He accepted that a 20% discount should apply on this ground;
3. he did not accept that a further discount ought to be made to reflect that the agency was non-assignable.

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:

1. seasonality;
2. the applicability of a weighted average when evaluating the company’s future earnings;
3. both experts agreed that it was necessary to disregard the actual remuneration paid to the directors and instead substitute market figures;
4. some revenues could be deducted on the basis that they have been paid in the past but would be not expected in the future.

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.