Professional Documents
Culture Documents
Background
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Leasehold Interests
14.
Examples
Appendix 1
Examples
1.
Background
1.1
1.2
For the purpose of calculating the capital gain arising on the disposal
of the separate assets in accordance with the Taxation of Chargeable
Gains Act (TCGA) 1992.
b.
c.
d.
The price paid for a business sold as a going concern may include any or all
of the following assets:
a.
b.
c.
d.
Goodwill
e.
The purchaser may also separately acquire consumables and stock but these
are usually valued separately and will not normally be included in the sale
price to be apportioned.
1.3
2.
Some of the principles set out in this Practice Note are applicable to
apportionments for all types of businesses but the note deals mainly with the
particular issues that have arisen where the property is a trade related
property valued using a profits approach, e.g. public houses, hotels, petrol
filling stations, cinemas, restaurants, care homes etc (see paragraph 4 below).
In these cases there can be particular difficulties in identifying the sum
attributable to goodwill and this is fundamental to the apportionment.
For the purposes of calculating a capital gain s.52 of the TCGA 1992 provides
that any apportionment shall be on a just and reasonable basis.
2.2
2.3
For the purposes of calculating any Capital Allowances claimed s.562 CAA
2001 similarly provides that any apportionment should be on a just and
reasonable basis unless other specific provisions disapply the application of
s.562 in whole or in part.
2.4
For the purpose of calculating the cost of purchased goodwill Part 8 of the
Corporation Tax Act 2009 (CTA 2009) provides that goodwill has the
meaning it has for accounting purposes 1 . Accounting guidance (FRS 2 10)
provides that purchased goodwill should be taken to be the "difference
between the cost of an acquired entity and the aggregate of the fair values of
that entity's identifiable assets and liabilities" (see paragraph 12 below).
2.5
Unlike the Capital Gains, SDLT and Capital Allowances provisions which
provide for an apportionment approach, the starting point for Part 8 of CTA
2009 is to consider whether the accounts are prepared in accordance with
generally accepted accounting practice (GAAP) 3 . Where accounts are not
GAAP compliant the purchased goodwill is to be calculated as if the
company has prepared GAAP compliant accounts.
An apportionment adjustment under s.856(4) CTA 2009 can only be made in
the circumstances where assets have been acquired together with other
assets as part of one bargain and the values allocated to those particular
assets have not already been allocated a value in accordance with GAAP i.e.
fair value.
In practice, apportionment is only required in limited circumstances. For
example if a company has not applied acquisition accounting, or not applied
acquisition accounting correctly, and that failure is material (i.e. accounts are
not GAAP compliant) the adjustment is to be made under section 717(1) CTA
2009. However, if that failure is not material (so the accounts remain GAAP
compliant) then the adjustment will be made under section 856(4) CTA 2009.
2.6
3.
The various statutory provisions do not define the method of arriving at a just
and reasonable apportionment but any apportionment should generally seek
to apportion the price paid between the underlying assets included in the sale
on the basis of their relative values and the contribution they make to the price
that is being apportioned.
Halsbury's Laws of England, 4th edition, Vol. 35 at page 1206 states that:
The goodwill of a business is the whole advantage of the reputation and
connection with customers together with the circumstances whether of habit or
1
2
This note does not take account of the recently issued UK accounting standard, FRS 102, approved
by the Financial Reporting Council in March 2013. This is only mandatory for accounting periods
beginning on or after 1 January 2015, although it may be adopted early if desired. It is not expected
there should be significant differences in practice to the principles applicable under existing UK GAAP.
3.3
The leading legal authority on the meaning of goodwill is found in IRC v Muller
& Co Margarine Limited [1901] AC 217. In answer to the question "what is
goodwill?" Lord Macnaghten said:
It is a thing very easy to describe, very difficult to define. It is the benefit and
advantage of the good name, reputation and connection of a business. It is
the attractive force which brings in custom. It is the one thing which
distinguishes an old-established business from a new business at its first
stage.
Lord Macnaghten went on to say that:
Goodwill is composed of a variety of elements. It differs in its composition in
different trades and in different businesses in the same trade. One element
may preponderate here; and another there.
4.
3.4
3.5
4.2
See Trego v Hunt [1896] AC 7 at 16, 17, 23, 27, HL and H P Bulmer Ltd and Showerings Ltd v J Bollinger SA
[1977] 2 CMLR 625, CA.
5
R J Reuter Co Ltd v Ferd Mulhens [1954] Ch 50 at 89, [1953] 2 All ER 1160 at 1179, CA per Evershed MR.
6
intrinsically linked to the returns an owner or occupier can generate from such
use.
5.
7
8
4.3
TRPs are often individual and exhibit unique features in terms of their location,
character, size, consents and levels of adaptation or construction specific to
their particular use. It is these features that lead to the need for specific
valuation treatment within the valuation profession, often utilising a profits
based methodology to determine market value. (This involves estimating the
trading potential of the property.)
4.4
Trading potential is defined in the RICS GN2 as the future profit, in the
context of a valuation of the property, that a reasonably efficient operator
would expect to be able to realise from occupation of the property. This could
be above or below the recent trading history of the property. It reflects a
range of factors such as the location, design and character, level of adaptation
and trading history of the property within the market conditions prevailing that
are inherent to the property asset 7 .
4.5
It has in the past been argued that because the business in TRPs is usually
largely or wholly incapable of being sold separately from the property there is
little or no goodwill (see the Lands Tribunal decision in Coles Executors v IRC
(1973) concerning the valuation of a public house for Estate Duty). On the
sale of a business operated from such properties, unless there were other
separately identifiable intangible assets included in the sale, the whole of the
purchase price would normally be apportioned to the property and chattels, it
being argued that there was no goodwill.
5.2
The above view was often put forward by purchasers seeking to claim Capital
Allowances on fixtures which formed part of the property. However, since the
introduction of SDLT and the provisions now contained in Part 8 CTA 2009,
HMRC has seen increasingly large sums apportioned to goodwill (away from
the underlying property) in order to maximise the claim under Part 8 CTA 2009
and minimise the amount of SDLT payable.
5.3
HMRC accept that if a business is sold as a going concern the sale may
include some element of goodwill. The question to be answered is not whether
goodwill exists, but what is the value of that goodwill? That question has to be
decided on the facts of each individual case and will vary depending on the
type of property and use. In some cases the value of the goodwill may be
nominal but in some it may be substantial.
6.
7.
Valuing Goodwill
6.1
6.2
6.3
6.4
The valuation of the tangible assets must reflect the facts at the valuation date
and not, for example, treat the property as stripped of chattels and empty of
occupiers when it was not. There should be no assumption of an empty and
bare property unless that is representative of the facts. If, contrary to the
evident facts, it were to be assumed for the purposes of valuation that the
property has lost any licences, been stripped of chattels and left vacant for a
period of time then the value will be significantly reduced and the value of
goodwill in the final apportionment, arrived at by deduction, would be
unreasonably inflated.
An assumption of vacant possession does not imply that the property is
empty, but that physical and legal possession will pass on completion. Any
parts of the property occupied by third parties is a matter of fact for
consideration within the valuation. For example, in relation to care homes the
presence of residents occupying under short terms licences at the valuation
date will be a consequence of the propertys established use and a fact to be
reflected in the property valuation. The valuer, or a purchaser, would
nevertheless still have to make a judgement as to how many residents may
choose to remain on a change of ownership. This may affect the timing and
level of anticipated income to be reflected in the valuation.
7.3
7.4
The valuation of the property should have regard to any established use or
trading history up to the valuation date as this may influence both the timing
and level of future income a purchaser would expect. A property that has been
operational up to the date of valuation is likely to have a higher value than one
that has been empty for six months because the purchaser will anticipate
greater certainty and immediacy of a trading income stream due to continued
customer patronage. Established use provides the likelihood of sustaining a
level of use and income generation for the REO and reduces the risk of delay a running start rather than a cold start.
7.5
However, many of the existing residents may wish to continue to reside in the
property following any change of ownership and those residents would be free
to enter into new contracts with the purchaser. Equally the purchaser of the
property may be prepared to pay an additional sum to the vendor (over and
above the property value) to acquire these contracts if it is perceived they
provide greater certainty and immediacy of full trading incomes (that is
goodwill or business value).
7.6
7.7
7.8
a.
A small public house to be run by the purchaser with help from parttime bar staff. The purchaser has acquired the business as a going
concern but there are no contracts with customers and the purchaser
wishes to enter their own contracts with suppliers and employ their
own staff. In such a case there may be no identifiable difference
between the price paid for the business as a going concern and the
price that a purchaser would pay to acquire all the tangible assets. In
such a case the value of the goodwill may be nominal.
b.
When purchasing such a business as a going concern the purchaser will often
have obtained a valuation of the tangible assets as an operational entity in
accordance with the RICS GN2 (see paragraph 10 below). In addition, an
alternative valuation of the property based on special assumptions (e.g.
vacant following a failure of the business, no accounts providing evidence of
trade, stripped of chattels and licences lost) may also be obtained for bank
lending purposes. For the purposes of calculating the value of goodwill it
would not be appropriate to deduct a valuation based on such special
assumptions that do not reflect the actual circumstances prevailing at the
valuation date. It is important to recognise that the valuation of the property as
8.
8.2
When valuing the tangible assets of an operational TRP, the aim should
normally be to arrive at a capital value that fairly represents the price that an
owner-occupier purchaser would be prepared to pay to acquire all the tangible
assets together, having regard to the circumstances existing at the valuation
date. Having decided on the appropriate assumptions (see paragraphs 7.3 7.6 above) it is then necessary to consider the most appropriate method of
valuation. The appropriate method of valuation is a matter for the valuer
having regard to the facts, but most TRPs are valued using the profits method
of valuation. This valuation method requires consideration of both the level
and timing of estimated trading income and is described in detail in the RICS
GN2 but essentially it involves the following:
A valuation of the tangible assets using the profits method has the following
advantages:
a.
b.
c.
the purchase price paid for the going concern and any GN2 valuation
of the tangible assets as an operational entity can be analysed to
provide evidence of the FMT/FMOP and a multiplier for the actual
subject property at the valuation date.
d.
8.3
9.
b.
c.
d.
the comparable rental evidence will relate to lettings where the tenant
has had to provide the chattels and the return on this capital and risk is
reflected in the rents paid.
e.
the valuation using this approach represents the value of the property
to an investor not an owner-occupier: the RICS GN2, paragraph 8.3,
notes that the capitalisation rate adopted for investment valuations
differs from that for vacant possession values.
f.
10
established trading history and the ability to continue trading from day
one. Isolating the bare property asset may unfairly apportion any
premium or share of marriage value away and overstate the intangible
elements.
9.2
10.
10.2
The guidance makes it clear that a valuation in accordance with GN2 should
relate only to the valuation of an individual property valued on the basis of
trading potential. The valuation is of the property as a 'place to do business',
not a valuation of the actual business itself. Valuations of businesses are
covered in separate guidance. GN2 makes it clear that the trading potential of
the property should be properly reflected within the property value and that the
current operators goodwill (personal goodwill) is not to be reflected.
10.3
GN2 also makes it clear that the operational entity usually includes:
11
10.4
Whilst GN2 states that it does not apply to apportionments for tax purposes,
HMRC/VOA consider that for the purpose of arriving at the value of goodwill
(see paragraph 11.2, Step 2, below), it should normally be acceptable to
deduct a GN2 valuation of the operational entity as reflecting the established
valuation approach to properties of this nature.
10.5
.
11.
In CGT and SDLT cases the apportionment of the sale price paid for a
business as a going concern should be approached by first identifying the
value of any goodwill (and other separately identifiable intangibles assets)
along the lines described in paragraphs 6 10 above. After deducting this
from the total sale price, the in-situ value of the chattels may then be deducted
to leave the value of the property.
11.2
11.3
Step 1
Step 2
Step 3
Step 4
Step 5
Step 1
12
The market value of the tangible assets should be assessed as at the date of
disposal/sale on the basis defined in UKGN3 (Valuations for CGT, IHT and
SDLT) reflecting the assumptions in paragraphs 7.2 and 7.4 above.
HMRC/VOA consider that, for the purpose of arriving at the value of goodwill,
it should normally be acceptable to deduct a GN2 valuation of the operational
entity.
In particular the valuation should reflect the following:
11.4
a.
b.
c.
all the facts pertaining at the valuation date such as the availability of
possession, the fact that the property is fully equipped and ready to
trade, the fact that the property was in use up to point of transfer etc.
d.
e.
that the purchaser may either bring in their own staff or seek to reemploy some of the existing staff.
f.
that the purchaser will take into account the likelihood of any future
bookings sticking with the property if they choose to run the business in
the same manner as the vendor.
g.
that the purchaser will take into account the likelihood of any existing
care home residents opting to stay with the property if they choose to
run the business in the same manner as the vendor.
Step 2
The sum attributable to goodwill and any other intangible assets included in
the sale should be arrived at by deducting the value of the tangible assets
(from Step 1 above) from the sale price (or market value) of the business.
11.5
Step 3
The sum attributable to any chattels included in the sale should be arrived at
by estimating the value of the chattels to an incoming purchaser. The value of
the chattels to an incoming purchaser will normally be based on their
depreciated replacement cost but in some cases they may be of no value, for
example, if the purchaser intends to refit the premises.
10
13
11.6
Step 4
The sum attributable to the property should be arrived at by deducting the
value of the chattels (the Step 3 value) from the value of the tangible assets
(the Step 1 value).
11.7
Step 5
Caseworkers should always stand back and consider whether the answer
produced by the above approach is reasonable in the particular circumstances
of the case. For instance, if a business is sold in an arms length transaction at
a price that is significantly in excess of the market value of the business as a
going concern it may be appropriate to firstly value the business and then
apportion the excess sale price on a pro-rata basis.
Example:
Sale price
Market value of business
=
=
600,000
500,000
Property
Chattels
Goodwill
Total
=
=
=
=
450,000
20,000
30,000 (i.e. 500,000 (450,000 + 20,000))
500,000
=
=
=
450/500 x 600,000
20/500 x 600,000
30/500 x 600,000
Pro-rata apportionment:
Property
Chattels
Goodwill
Total
=
=
=
=
540,000
24,000
36,000
600,000
11.8
11.9
Taxpayers may also challenge the above approach based on the Special
Commissioners decision in the case of Balloon Promotions Limited v Wilson
(Insp of Taxes) in which it was suggested that goodwill should be looked at as
a whole and that the value of adherent goodwill was not automatically
subsumed in the property value. The decision of the Special Commissioner in
the Balloon case concerned appeals against a refusal to grant rollover relief
under S152 of the Taxation of Chargeable Gains Act 1992 in respect of
chargeable gains following the sale of the Companys franchised Pizza
14
12.
As noted above (paragraph 2.4), for the purpose of calculating the cost of
purchased goodwill Part 8 CTA 2009 provides that goodwill has the meaning
it has for accounting purposes. UK GAAP (FRS10 Goodwill and intangible
assets) provides that purchased goodwill should be taken to be the
"difference between the cost of an acquired entity and the aggregate of the
fair values of that entity's identifiable assets and liabilities. Positive goodwill
arises when the acquisition cost of the entity exceeds the aggregate fair
values of the identifiable assets and liabilities. Negative goodwill arises when
the aggregate fair values of the identifiable assets and liabilities of the entity
exceed the acquisition cost". Thus, purchased goodwill recognised for
accounting purposes is a residual 11 . For the avoidance of doubt, purchased
goodwill only arises for accounting purposes where there has been a business
acquisition (combination).
12.2
12.3
a.
market value, if assets similar in type and condition are bought and
sold on an open market [as here]; or
b.
11
IFRS 3, (Appendix A) defines goodwill as; [a]n asset representing the future economic benefits arising from
other assets acquired in a business combination that are not individually identified and separately recognised.
15
12
13
16
UK GAAP and IFRS (unless, in IFRS, market or other factors suggest that a
different use by market participants would maximise the value of the asset).
13.
12.5
Negative goodwill (i.e. a gain resulting from a bargain purchase) can arise,
under both UK GAAP and IFRS. Within UK GAAP, negative goodwill is
carried on the balance sheet and recognised in the profit and loss account in
the periods in which non-monetary assets are recovered (by depreciation or
disposal) or in which the benefits are expected to be realised. Within IFRS,
however, the gain resulting from a bargain purchase is recognised in profit or
loss on the acquisition date.
12.6
In HMRCs view, for TRPs, the EUV of the tangible assets required for the
purpose of calculating the cost of purchased goodwill under Part 8 CTA 2009
will normally be represented by the market value of the assets as an
operational entity, in accordance with the guidance contained in the RICS
GN2.
Leasehold Interests
13.1
In some cases it will be necessary to apportion the price paid for a leasehold
interest but the same principles apply. The valuations and apportionment
should be approached using the same assumptions and approach described
above.
13.2
It should be borne in mind that for TRPs it is not uncommon for leasehold
interests to be sold for substantial premiums even when the rent has recently
been reviewed. The premium in such cases may be attributable to any or all of
the following:
a.
The reviewed rent may not reflect the full rental value because it may
disregard the enhanced trading potential attributable to the occupation
of the property by the tenant and predecessors (in accordance with
s.34 LTA 1954).
b.
The reviewed rent may not reflect the value of improvements carried
out by the tenant or predecessors when fitting out the property (in
some cases the rent may only represent a shell rent).
c.
d.
e.
f.
17
g.
13.3
14.
The value of any goodwill and other intangible assets included in the sale
should be determined by adopting the same valuation assumptions and
approach outlined in paragraphs 7 and 8 above.
Examples
14.1
18
APPENDIX 1
Examples
All the figures used in the examples below are for illustrative purposes only.
Example 1
The Facts
A owns and runs a public house. The business has been struggling for some years because
the owner is nearing retirement and has lost interest in the business. The level of trade has
fallen over the last 2 years and profit margins are low because wage costs are higher than
would be expected due to overstaffing.
The Figures
The salient figures are as follows:
FMT the actual trade based on an average of the last two years accounts is only
445k pa but the estimated FMT (assuming a reasonably efficient operator 17 ) is
500k pa.
FMOP the actual operating profit is only 70k pa but the estimated FMOP 18 ,
reflecting lower wage costs, is 125k pa.
The business has been sold as a going concern for 875k. This price reflects the
potential to increase the trade up to the FMOP level but also the possible delay
before this level of trade could be achieved.
The chattels are included in the accounts at a net book value of 25k but their market
value to an incoming purchaser would be 35k.
The market value of the property as an operational entity is 875k. This is based on a
FMOP of 125k pa x 7 Years Purchase (YP).
The market value of the property based on special assumptions is 450k (this
assumes that the property has been empty and closed for 6 months, no trading
accounts are available, the chattels have all been removed, the licences have been
lost and a sale is required within 180 days).
The purchaser claims that the sum that should be attributed to goodwill is the
purchase price less the separate values of the property (assuming it to be empty etc)
and the chattels, ie. 875k (450k + 25k) = 400k.
17
Reasonably efficient operator is defined as a concept where the valuer assumes that the market participants
are competent (but not exceptional) operators, acting in an efficient manner, of a business conducted on the
premises. It involves estimating the trading potential rather than adopting the actual level of trade under
the existing ownership. ( Royal Institution of Chartered Surveyors).
18
Fair Maintainable Operating Profit (FMOP) is defined as the level of profit, stated prior to depreciation and
finance costs relating to the asset itself (and rent if leasehold), that the reasonably efficient operator (REO) would
expect to derive from the fair maintainable turnover (FMT) based on an assessment of the markets perception of
the potential earnings of the property. It should reflect all costs and outgoings of the REO, as well as an
appropriate annual allowance for periodic expenditure, such as decoration, refurbishment and renewal of the
trade inventory ( Royal Institution of Chartered Surveyors).
19
The HMRC/VOA approach to the apportionment required for SDLT purposes would be as
follows:
The value of the goodwill, reflecting its value when sold with the property, is the sale
price paid for the business as a going concern less the value of all the tangible
assets as an operational entity. In this case that would be 875k - 875k = nil.
However, as the business has been sold as a going concern something needs to be
apportioned to goodwill so a nominal sum of 1 is adopted, leaving a net sale price of
874,999.
The sum attributed to the property is in this case the net sale price (874,999) less
the value of the chattels, reflecting their value when sold with the property (35k),
which is 839,999.
Price paid for the going concern less the value of the tangible assets as an
operational entity, ie. 875k - 875k = nil.
Example 2
The Facts
B owns and runs a public house. The business has been exceptionally well run for a number
of years. The level of trade and profits are much higher than would be expected for a similar
pub in this location.
The Figures
The salient figures are as follows:
FMT the actual trade based on an average of the last two years accounts is 600k
pa but the estimated FMT (assuming a reasonably efficient operator) is only 500k
pa.
FMOP the actual operating profit is 180k pa but the estimated FMOP, reflecting
typical profit margins, is only 125k pa.
The business has been sold as a going concern for 1.1m. This price reflects the
purchasers belief that they can continue to operate the business in the same manner
as the vendor and sustain at least a proportion of the exceptional actual level of
profits.
The chattels are included in the accounts at a net book value of 25k but their market
value to an incoming purchaser would be 40k.
The market value of the property as an operational entity (excluding exceptional
profits) is 950k. This is based on a FMOP of 125k pa x 7.6 Years Purchase (YP)
based on evidence of other sales and reflecting a sustainable volume of trade for the
property.
The market value of the property based on special assumptions is 550k (this
assumes that the property has been empty for 6 months, no trading accounts are
available, the chattels have all been removed, the licences have been lost and a sale
is required within 180 days).
20
The purchaser claims that the sum that should be attributed to goodwill is the
purchase price less the separate values of the property (assuming it to be empty etc)
and the chattels, ie. 1.1m (550k + 25k) = 525k.
The value of the goodwill, reflecting its value when sold with the property, is the sale
price paid for the business as a going concern less the value of all the tangible
assets as an operational entity. In this case that would be 1.1m - 950k = 150k.
The sum attributed to the property is in this case the value of the tangible assets as
an operational entity (950k) less the value of the chattels, reflecting their value
when sold with the property (35k), which is 915k.
Price paid for the going concern less the value of the tangible assets as an
operational entity, ie. 1.1m - 950k = 150k.
Example 3
The Facts
A owns and runs a modern residential care home. The business has been run in a
reasonably efficient but not exceptional manner for a number of years. The occupancy rate,
fees and level of profits are what would be expected for a similar residential care home in this
location.
The Figures
The salient figures are as follows:
FMT the actual trade based on an average of the last two years accounts is 935k
pa and this accords with the valuers estimate of FMT (assuming a reasonably
efficient operator)
FMOP the actual operating profit is 330k pa and the estimated FMOP is also
330k pa.
The business has been sold as a going concern for 2.3m. This price reflects the
purchasers belief that they can continue to operate the business in the same manner
as the vendor and maintain the actual level of trade. This is based on the actual
operating profit of 330k pa x 7 Years Purchase (YP).
The chattels are included in the accounts at a net book value of 75k and their market
value to an incoming purchaser would be 75k.
The market value of the property as an operational entity is 2.2m. This is based on a
FMOP of 330k pa x 6.7 Years Purchase (YP). The YP reflects the risk that on a
change of ownership some residents and staff may choose to move elsewhere and
there may therefore be some delay before the full FMOP is achieved.
21
The market value of the property based on special assumptions is 1.4m (this
assumes that the property has been closed for 3 months, no trading accounts are
available, the chattels have all been removed, the licences have been lost and a sale
is required within 180 days).
The purchaser claims that the sum that should be attributed to goodwill is the
purchase price less the separate values of the property (assuming it to be empty etc)
and the chattels, ie. 2.3m (1.4m + 75k) = 825k.
The value of the goodwill, reflecting its value when sold with the property, is the sale
price paid for the business as a going concern less the value of all the tangible
assets as an operational entity. In this case that would be 2.3m - 2.2m = 100k.
The sum attributed to the property is in this case the value of the tangible assets as
an operational entity (2.2m) less the value of the chattels, reflecting their value
when sold with the property (75k), which is 2.125m.
Price paid for the going concern less the value of the tangible assets as an
operational entity, ie. 2.3m - 2.2m = 100k.
Example 4
The Facts
B owns and runs a modern residential care home. The business has been very well run for a
number of years with the owner working all hours. Whilst the occupancy rates, fees and level
of profits are all higher than would be expected for a similar residential care home in this
location, wage costs are lower than considered appropriate.
The Figures
The salient figures are as follows:
FMT the actual trade based on an average of the last two years accounts is 950k
pa but the estimated FMT is only 900k pa.
FMOP the actual operating profit is 400k pa but the estimated FMOP is only 330k
pa.
The business has been sold as a going concern for 2.525 m. This price reflects the
purchasers belief that they can continue to operate the business in the same
exceptional manner as the vendor and maintain the actual level of occupancy, fees
and profits. This is based on the actual operating profit of 400k pa x 6.3 Years
Purchase (YP).
The chattels are included in the accounts at a net book value of 50k and their market
value to an incoming purchaser would be 50k.
22
The market value of the property as an operational entity is 2.3m. This is based on a
FMOP of 330k pa x 6.95 Years Purchase (YP). The YP reflects the risk that on a
change of ownership some residents and staff may choose to move elsewhere and
there may therefore be some delay before the full FMOP is achieved.
The market value of the property based on special assumptions is 1.575m (this
assumes that the property has been closed for 3 months, no trading accounts are
available, the chattels have all been removed, the licences have been lost and a sale
is required within 180 days).
The purchaser claims that the sum that should be attributed to goodwill is the
purchase price less the separate values of the property (assuming it to be empty etc)
and the chattels, ie. 2.525m (1.575m + 50k) = 1m.
The value of the goodwill, reflecting its value when sold with the property, is the sale
price paid for the business as a going concern less the value of all the tangible
assets as an operational entity. In this case that would be 2.525m - 2.3m = 225k.
The sum attributed to the property is in this case the value of the tangible assets as
an operational entity (2.3m) less the value of the chattels, reflecting their value
when sold with the property (50k), which is 2.25m.
Price paid for the going concern less the value of the tangible assets as an
operational entity, ie. 2.525m - 2.3m = 225k.
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