When assessing the amount of compensation payable for damage to a
viable business following a compulsory taking, goodwill can be a major
part of the compensation payable. However, there are differences of
opinion in the definition of goodwill:
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 at its first start" -
IRC v Muller,  AC217.
Fed Comm v Williamson (1943) The Valuer, October 1943, p306 Rich
J made the following observations:
Goodwill has been
said to be "the attractive force which brings in custom" (Inland
Revenue Commissioner v. Muller & Cos Margarine Ltd. # an English
case). Hence to determine the nature of the goodwill in any one given
case, it is necessary to consider the type of business and the type of
customer which such a business is inherently likely to attract as well
as all the surrounding circumstances. New customers vary.
In Whiteman Smith Motor Company v. Chaplin, the types were zoologically
classified into cats, dogs, rats and rabbits. The cat prefers the old
home to the person who keeps it and stays in the old home although the
person who has kept the home leaves and so it represents the customer
who goes to the old shop, whoever keeps it, and provides the local
goodwill. The faithful dog is attached to the person, rather than to
the place, he will follow the outgoing owner if he does not go too far.
The cat has no attachments and is purely casual. The rabbit is
attracted by mere propinquity. He comes because he happens to live
close by and it would be more trouble to go elsewhere. These categories
serve as a reminder that the goodwill, of a business is a composite
thing, referable in part to its locality, in part to the way in which
it is conducted and the personality of those who conduct it and in part
to the likelihood of competition, many customers being no doubt
actuated by mixed motives in conjerring their custom." (p307).
As mentioned above, in Whiteman Smith Motor Co v Chaplain 
2KB35 at 42,49,50 animals were used to describe the different types of
goodwill as follows:
The cat prefers the old home to the person who keeps it. Therefore, cat
goodwill is "site goodwill".
The faithful dog is more attached to the person than the place.
Therefore, dog goodwill is "personal goodwill" and is transportable.
The rat has no attachments and is purely casual. Therefore, the rat
customer does not add to the business goodwill rather, his/her's input
is part of the land value.
The rabbit shops by
mere propinquity that is, convenience. This factor will almost
certainly be part of the commercial land value and does not add to the
value of goodwill.
There are two
different paradigms of goodwill:
THE EXTRA VALUE OF AN
- The extra value
of an "established" business - the IRC v Muller concept
- The value of
expected "superprofits" - the better concept for valuation purposes.
is common for business brokers and accountants to value goodwill as the
payment made by the purchaser of a business on a "walk in walk out"
basis. Typically, when a business is sold the purchaser will pay a
purchase price for the business based on the rent paid (if there is a
"profit rental"), residue length of the lease, the fact that the
business is established (for example, clients on the books, regular
customers), and any superprofits arising from the personality of the
proprietor and site advantage.
The price paid for stock is "stock at value" (SAV) that is, after the
sale the two parties stocktake and agree on it's value. If the value of
stock cannot be agreed upon under the standard form business contract,
an arbitrator will decide its value. This provides the total value of
goodwill and includes personal and site goodwill (if any).
TOTAL DESTRUCTION OF THE BUSINESS
If the business is totally destroyed by the compulsory taking and the
proprietor cannot reestablish nearby, then Consequential Losses must
include the total value the goodwill as this is a marketable component
of the business system which has been lost. The loss has been directly
caused by the compulsory taking.
It was using these
assets for the purpose of carrying on a business and if the value of
the business based on its earning capacity exceeded the value of the
tangible assets and that business was destroyed by the acquisition of
the land, the compensation to which the plaintiff company is entitled
should, having regard to the way the case was fought, be taken to
include an amount equal to the value of the whole undertaking regarded
as a going concern; for it was deprived of that sum by the loss of the
land and that was the value of the land to it" - Eastaway v C of A
(1951) 84 CLR 328, 12 The Valuer 42.
In Bennett v Comm for Railways, (1952) 12 The Valuer 169,
Sugerman J considered that the plaintiff had proved that he had made
reasonable efforts to find alternative suitable land to site elsewhere
but could not find such land. In that case the land had to be
physically similar but the available land was either too large to be
economically used or situated in areas where the particular
manufacturing business would not be allowed or lacking the necessary
access at two levels.
Eastaway's case (an engineering business) also held that although a
business can be conducted elsewhere its continuance may be impossible
because suitable alternate premises are not available to buy or rent
within the area to which the goodwill extends.
Where the business
is retail, of a local nature, depending on neighbours and customers and
so on, then if no suitable premises can be found in the locality,
obviously some compensation must be paid" - Hayes v Min of Works 
15 WAR 106.
McMillan CJ then went
on to state that compensation for loss of personal goodwill could not
be awarded but that compensation for the loss of site (local) goodwill
if found, either in the case of freehold or leasehold interests could
OF THE BUSINESS
If the dispossessed proprietor can relocate nearby (for example, in the
same shopping strip) then the personal part of goodwill is taken with
him to the new site and therefore, is not lost. He/she does not lose
the advantages of an established business as described in Muller's
The only part of the goodwill payable for the compulsory taking is
"site goodwill", that part which attaches to the subject site and
therefore, is lost on the compulsory taking of the real estate.
Most businesses are only partially damaged by a compulsory. This is
because the proprietor can either continue trading on the residue land
when only part of the site is affected (for example, following a
highways department road widening) or relocate nearby (for example, in
the same shopping centre). Therefore, the valuer is more concerned with
"site" or "local goodwill" than "personal and established" goodwill. To
determine whether or not there is site goodwill the business must enjoy
Although the affected
proprietor may be able to relocate, the new location after
reestablishment may reduce the profitability of the business. In this
case the difference must be site goodwill and therefore, is payable as
compensation. The dispossessed owner cannot claim losses brought about
by his own neglect or loss of health caused by the taking of his land.
This is too remote to be a compensation head - Bailey v Derby Corp
, 1 WLR 213, 1 AllER 443.
The dispossessed proprietor can claim for "disturbance" that is,
compensation for the loss of income and profits for the period until
the new business becomes established.
Even if a business is
being carried on at a loss, compensation for loss of goodwill should
still be paid. This is on the basis that the proprietor is worst off
because of the compulsory taking. That is, if the land had not been
taken he/she would not have suffered as great a loss. Further, the
business may have recovered in the long run.
See site goodwill
The valuer should investigate the following factors of the business:
1. THE EARNING CAPACITY OF THE BUSINESS
Will the present profits be maintained in the future and if so, for how
long? If a lease period has only 1 or 2 weeks to run there cannot be
2. CAN THE GOODWILL BE TRANSFERRED?
Personal knowledge and skill for example, that of a barrister cannot be
sold as a separate identity and therefore, such goodwill has no value.
The business may be so unusual it does not have a ready market. This
would mean that the business does not have goodwill.
3. TAX ADVANTAGES
Many cash businesses have a high goodwill component for example,
hotels. This is because the cash nature of the business allows the
owner to under declare income earned and therefore, pay less income
tax. The higher the tax avoidance in the industry, higher the goodwill.
METHODS OF VALUATION
The value of goodwill is determined by the market place usually through
a business broker or agent. If sales are available they can be analyzed
on a similar basis as for real estate transactions and the subject
business can then be valued by "direct comparison" with the sale
business. This method of assessment is used for unusual businesses were
trade formulae have not yet been established and for some hotels and
CAPITALIZATION OF NET PROFITS
Average net profits are found from previous years trading. They are
then capitalized at an appropriate capitalization rate commensurate
with the risk of the business. The value of the net tangible assets
(NTA) are then deducted the capitalized amount.
EXAMPLE OF THE CAPITALIZATION METHOD
Expected net profits: 100 000
Capitalize at 10% per annum:
100 000 * 100/10 = 1
Less Net Tangible
Assets: (300 000)
GOODWILL: 700 000
PURCHASE OF PAST PROFITS
Under this method the average of a certain number of previous years net
profits are taken and multiplied by an appropriate years purchase
Average 5 years net profits: 100 000
YP for the subject industry: 7
GOODWILL: 7 * 100 000 = 700 000
The profit figure used may be "gross" or "net" depending on what is
typical for the subject industry. The years purchase depends on
convention and varies with the type of business for example, a chemist
shops typically uses 10x average weekly earnings as the method for the
calculation of goodwill.
BASED ON TURNOVER
This method is suitable for businesses with a large turnover and a
small profit per item for example, supermarkets. A conventional formula
known to the trade is used:
Bakers: $10 000 per short tonne of flour used per week
Newsagents: $x per number of dailies and magazines and Sunday papers
sold per week.
calculated as the annual amount remaining from the profits after
deducting a reasonable amount for the proprietor and return on the
value of the net tangible assets. The super profit is then multiplied
by an appropriate years purchase:
Average net profits: 100 000
Net tangible assets (NTA): 600 000
Annual return: 600 000 @ 12% pa = (72 000)
Therefore, annual super profit = 28 000
Multiply by YP 2.5
GOODWILL: 70 000
APPORTIONMENT BETWEEN SITE AND PERSONAL GOODWILL
Once the total value of the goodwill is found, the following steps are
See right to occupy
after a compulsory taking
whether or not the site has some special attribute which could add to
the business's profit. However, this attribute must not be an inherent
and normal feature of a commercial site (for example, a corner
influence) as this is already included in the market value of the land.
whether or not the management is above average. If the management is
normal then any goodwill must be site goodwill.
- Is there a
famous name attached to the business? If so, then this is personal
goodwill. The delay in profit caused by the reestablishment of a
business after destruction through the construction of the public works
and relocation should be treated as loss of profits under the head;
THE BUSINESS MUST BE PROFITABLE
If the business is
running at a loss then it has no value - Hobart Bridge v Tasmania,
(1945) 9 The Valuer 62. However, since the compensation payable is
"special value to the owner", the dispossessed owner should be
compensated for any goodwill under a different head than "value of the
business". Otherwise, the affected proprietor is worse off afterwards
then before the compulsory taking. Further, the business should be
assessed to determine whether or not the proprietor may trade out of
the loss in the long run.
If the value of the business as a "going concern" is worth less than
the value of it's assets then the value of the assets is the
compensation payable and the business is ignored. For a claim for
disturbance to a business to succeed the property must be used at it's
highest and best use - Lodge v WCIC, 1967, 20 The Valuer 9, 14
See lessee's compensation
VALUATION OF SEPARATE INTERESTS ARE REQUIRED
Each person with an interest in land compulsorily taken can claim
compensation for that interest. Therefore, the lessee and the lessor
can each claim compensation so that neither claim is dependent on the
other. It is immaterial when determining the land value component of
each claim that the sum of the 2 parties interests exceeds the
unencumbered market value of the property. Therefore, the lessor's
interest should not be found by subtracting the lessee's interest from
the unencumbered market value - Rosenbaum v Min (1965) 114 CLR
424, 19 The Valuer 456.
Not only are special
factors applicable to each claim but probably because of "synergy", the
sum of the 2 interests exceed the unencumbered market value.