Haylett v Cayton & Anor

Where parties agree to value a terminated profit interest by reference to a notional sale, the exercise values the interest being bought out rather than the business as an actual sale. The court must apply the agreed valuation methodology to the purpose and facts of the case. It should not introduce assumptions, such as restrictive covenants or a forced sale, which contradict the notional premise. It should, however, allow for risks affecting future profits, including the possibility that a key individual may leave, retire or suffer ill-health. Maintainable earnings may be assessed by weighting recent results more heavily, while excluding unreliable or immature data and subjective projections. The resulting calculation is a guide to fair value, not a formulaic price.

The claimant and defendants had entered into a fee-sharing arrangement within an overarching joint venture or quasi-partnership relationship. In an earlier judgment dated 10 June 2013, the court held that the relationship was terminable at will and that termination required an orderly separation, including payment for the claimant’s 50% interest in the profits of the defendant firm as if that interest had been sold.

At this hearing, liability was no longer in issue. The principal question was the value of that profit interest as at 28 February 2011. The parties agreed that valuation should proceed on a maintainable-earnings basis. Issues included the treatment of the defendants’ evidence about a possible sale, historic fee figures, a contemporaneous budget, future risks and net debt. There were also two disputed deductions from the claimant’s pre-termination profit share.

1. Valuation premise. The agreed methodology was a means of valuing the claimant’s profit share, not the firm as such. The court therefore rejected the contention that the interest had nil value because the defendant would not have sold the practice, accepted a non-compete covenant or remained in the firm. Those were inconsistent with the agreed hypothesis of a notional sale and an orderly separation.
2. Relevant risks. The valuation nevertheless had to reflect the risks affecting future profits. These included the possible loss of the defendant through ill-health, retirement or recruitment by another firm. The court declined to apply business-valuation criteria mechanically and applied them to the purpose and facts of the particular valuation.
3. Maintainable earnings. A reasonable purchaser would give greater weight to recent results. The court adopted a weighted average of the 2008–2011 fee figures, excluded the 2007 figure because the practice was immature, and excluded the budget because it used a subjective projection to produce another projection. It assessed maintainable fees at £1.15 million and annual costs at £1 million, producing maintainable earnings of £150,000.
4. Fair value and outcome. Applying a multiplier of 3.5 and deducting net debt of £100,455 produced an arithmetical figure of £424,545 for the whole interest. Stepping back from that calculation and assessing the reasonable purchaser’s risk, the fair value of the claimant’s 50% interest was £200,000. The computer-equipment deduction was rejected for lack of evidence. A credit note of £4,345 for VAT on the PAYE/NI accrual was allowed against the claimant’s profit share. An order giving effect to the conclusions was to be drawn up.

The judgment followed an earlier liability judgment in the same proceedings, delivered on 10 June 2013. The court had held that the fee-sharing arrangement formed part of a terminable overarching joint venture or quasi-partnership relationship and that termination required an orderly separation of the parties’ interests. The present judgment determined valuation and outstanding profit-share issues.