In the years following the introduction of the Regulations to Great Britain on 1 January 1994, it was typical for an agent to put forward a claim for two years commission when terminated. There might be some horsetrading downwards or arguments about whether this was net, i.e. two years money less expense overheads or two years gross; however, most claims to compensation were resolved in this way. Heady days.
It was a good time for agents, particularly those with high expense overheads as there was less scrutiny or serious consideration of all factors, such as time spent on the agency, overheads, uncertainty in the market or length of the principal’s own distribution agreement.
Sure, cases arose where the judiciary attempted to grapple with the seemingly nebulous concept of compensation, such as that of Tigana Ltd. v Decoro Ltd. , where the judge set out 14 factors that ought to be taken into account when calculating compensation. However, generally speaking the “two year rule” prevailed. After all, this was European legislation and the French were getting two years so why not English agents? Wasn’t membership of the EU intended to create similar regimes in each country?
Well, the answer came in the case of Lonsdale (t/a Lonsdale Agencies) v. Howard & Hallam Ltd  where the House of Lords finally got a chance to have their say. They rubbished the concept of a “two year rule” and confirmed that henceforth the correct approach would be to award an amount of compensation equal to the value of the agency business at the date of termination, taking into account all “real world” factors. The Lords explained that “The value of the agency relationship lies in the prospect of earning commission, the agent’s expectation that “proper performance of the agency contract” will provide him with a future income stream. It is this which must be valued.” They also made it clear that in certain cases agents would need the benefit of expert evidence concerning the value and endorsed the first instance Judge’s analogy with small businesses of all kinds being bought and sold daily. Of course, this is true and a typical comparison is the sale of a hairdressing salon.
Therefore, since July 2007 a different approach to compensation has been adopted. Now it is typical for an agent to carefully consider a broad range of factors, such as expense overheads, market trends, notice period, sales growth, time spent on the agency, in order to gain an insight into the potential market value of the agency business. Whilst the two year rule is “dead” (to the extent that it was ever a “rule”), an agent may now achieve a greater or lesser value than that. Lonsdale is by no means all bad news; its principles need to be properly understood in order to present your agency’s best case. For instance, you should think carefully before bragging about the long hours spent on your agency; rather you should seek to run a streamlined business that requires as little time input as possible, since this is what is likely to be most attractive to a theoretical purchaser. If the incoming agent can dedicate Monday and Friday to leisure pursuits then they will surely pay more for such a business than one requiring a 50 hour week for the same returns.
Using this analysis, you can also get a better handle on the actual value of your agency business as it is in progress. If you are “flogging a dead horse” and the rewards simply aren’t sufficient then you may choose to relinquish the agency to focus on others, as any compensation may be modest in any event should the entitlement arise.
If your agency has been terminated you should gather information such as your last three years commission income and accounts and then consider the remaining income stream as a basis for discussing compensation. Once the relevant overheads have been stripped out of the income stream, the remaining net profit may then be multiplied by an appropriate figure to arrive at a final value for the agency. This is one approach to valuation but there will be others, or refinements to this one. For more information on our Commercial Agency services please fill out call back request form or call EAD today on 0151 735 1000.
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