Compensating registered businesses: accounts, goodwill and relocation

A registered business brings something no informal trader has: records. Accounts, tax returns, payroll, a lease. That makes the assessment more tractable and the negotiation considerably harder, because the claimant can quantify their loss and will.

The heads of claim

• The premises, where owned — at replacement cost, or the value of the leasehold interest where leased.
• Relocation cost — dismantling, transport, reinstallation, recommissioning, and the fit-out of new premises to an equivalent standard.
• Business interruption — profit lost during the move and the ramp-up afterwards, which for a manufacturing operation is measured in months.
• Permanent loss of profitability where the new location performs worse, or where the business cannot be re-established at all.
• Employees, who are affected persons in their own right and whose entitlement does not run through the employer.[1]

Total extinguishment versus relocation

The first analytical question is whether the business can move at all. A workshop with general equipment can. A business whose value is location — a fuel station on a junction, a hotel beside a lake — frequently cannot, and compensating relocation costs for a business that will not survive relocation misstates the loss.

Where extinguishment is the realistic outcome, the assessment is of the value of the business as a going concern rather than the cost of moving it. That is a larger number and a defensible one, and disputes about which category applies are best resolved before valuation rather than after.[2]

Ask first whether this business can exist somewhere else. Everything about the valuation follows from the answer.

Working with accounts that understate

Many small registered businesses keep accounts prepared for tax purposes that understate profit. At compensation time the same accounts understate the claim, and the owner will say so.

This is uncomfortable and it is routine. The workable approach uses the accounts as one input alongside observable evidence — turnover implied by stock movement, employment levels, utility consumption, sector benchmarks — and states the basis chosen. Refusing to look beyond filed accounts is defensible and will produce assessments the affected businesses regard as fictional; accepting an owner's unsupported assertion is not defensible at all.

Leases, and who holds what

Where a business rents, the value is split. The landlord loses a building and a rental stream; the tenant loses occupancy, fit-out they paid for, and the business itself. Paying the landlord alone is the most common failure in this category.[3]

Entitlements should be assessed separately for each interest, and the register must be able to hold both against one address. Where the lease has an unexpired term, its value is the tenant's, not the landlord's.

Employees

A displaced business lays people off. Those employees are economically displaced by the project, and the standards treat them as affected persons rather than as a matter between them and their employer.[4]

Practically this means enumerating employees during the business survey — name, role, length of service, wage — and providing an entitlement: transitional support pegged to the wage and the expected interruption, and access to the livelihood programme. Very few matrices carry the row, and it is one of the easier ones to add.

Getting the survey right

• Survey the business separately from the premises and from the landlord.
• Record employees individually.
• Establish early whether relocation is feasible, and document the reasoning.
• Collect two or three years of records where they exist, not one.
• Note the fit-out and equipment that would have to be replaced, with photographs.