Goodwill & Its Denial
This one straightforward little word sticks in the craw of every single Pub Co bar none and indeed all of their hired ‘experts’… What is it ?… Goodwill of course. Before we open up this can of worms, we need a definition.
We turned to the Valuation Office Agency and their standard definitions which recognises two classes or types of ‘goodwill’, namely Intrinsic and Transient.
INTRINSIC GOODWILL is reflected in the fact that the building in question has been structurally adapted for its existing use, is capable of holding the requisite Local Authority Premises Licence, is fitted out for the purpose of its trading usage.
It is compliant with all statutory and civic regulations and is lease compliant and the property is capable of being actively traded. Intrinsic goodwill can easily be recognised and can be set aside if for example there have been significant structural works.
The so called ‘Wetherspoons clause’ that disregards all the conversion works which on a case by case basis is stipulated in the property lease. The rent calculation is reduced accordingly.
This then cross links to the definition of ‘Reasonably Efficient Operator’ of which we have covered through previous newsletters. TRANSIENT GOODWILL is that trade which is deemed not to be not affixed to the property as with intrinsic goodwill and which could be removed from the property if the trading operator or trading style did not exist.
Transient goodwill is the additional trade over and above that which would normally be expected to be retained in the property following the guidelines of intrinsic goodwill.
Basically either individual personality or acumen linked with an associated style of trading should be disregarded. It is a fundamental truism that transient goodwill is never taken into consideration by Pub Cos, either in the preparation of a Rent Assessment Proposal (RAP) nor by the ‘experts’ hired subsequently to promote their Pub Co masters.
To quote one very senior Pubco Chartered Surveyor (now retired) when asked why he never included goodwill who replied… “never exists, don’t give it the time of day, anyone can take over what’s there if they are any good. Forget it”.
Getting a Business Development Manager (BDM) to admit there really is transient or personal goodwill is like trying to pull teeth.
The record of a recent conversation with a BDM (Southern England, big city, no names of course, music based business); “Surely you must recognise that trade would plummet if XXX were not here. With all of his big band connections, TV appearances, trade press mentions, nobody could follow that” BDM “We look at everything on a case by case basis and give due consideration to all the facts in question, look at whether there is an REO in place” “But that must include a hefty deduction for goodwill.
You must admit that this guy is well above REO status” BDM “Music is a funny business, fickle for sure, tastes change, people change.
The place was still music based at the last review. Oh and the deal we did then is of course confidential between us and the previous tenant” “So you are saying that nothing would change if XXX were not the driving force to attract terrific live acts at next to nothing appearance fees due to his connections” BDM “We take everything into consideration, the pluses and the minuses, the pros and the cons, a totally holistic approach” “But the forecast fair maintainable trade is an exact mirror image of the accounts of XXX.
That cannot be correct surely. When he took over the lease four years ago, the trade was less than half of what it is now ?” BDM “I can assure you that the tenant’s accounts are only used for guidance, nothing more.
We take a three hundred a sixty degree all round view, always have” “Do you recognise goodwill in this case?” Silence…fiddling with laptop keys… “Is that a yes or a no? Will the laptop give you a clue ?” BDM “Well it is of course a question of degree, levels of promotion, latest product range.
Don’t get me wrong, we hold XXX in very high regard but it is a question of us maximising shareholder value, blue sky thinking, you know what I mean” “I don’t…can you confirm that there is goodwill in this case yes or no?” BDM “I think I would have to refer your view, not mine, further up the feeding chain. There may be merit, maybe, but it is out of my hands. Way of the world.”
This typical of the mind-set that still prevails in that the acceptance of personal goodwill. It is to be denied at all costs.
What is of concern is that the Chartered Surveyors who then act for the Pub Co follow the self-same mantra.
Would they buck the traces of their corporate masters and make a goodwill allowance. Hardly likely.
The glimmer at the end of the tunnel is the Independent Assessor in MRO cases and the Independent Expert linked to PIRRS.
The goodwill deduction comes at the end of the profits test calculation. A deduction of maximum 10% is allowed against the calculated rent assessment.
BUT if the allowance came at the start of the calculations, by say reducing the trade level by 30% that would in turn reduce the rent substantially.
Not tinkering with the ‘recognition’ right at the end of the calculations It has ever been thus and the uphill battle will continue to have goodwill recognised where there is a solid case for its recognition.
Morgan & Clarke Chartered Surveyors
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