An agent will be entitled to a termination payment when his agency is terminated unless the principal can show the agent has fundamentally breached the agency agreement. A termination payment is also payable when an agency agreement reaches the end of a fixed term, or if the agent retires or dies.

This article explores how compensation payments are calculated under Regulation 17 of the Commercial Agents Regulations following the leading case of Lonsdale v Howard and Hallam.

There are two types of termination payments: compensation and indemnity. Compensation is payable unless the parties have agreed that an indemnity should be payable instead.

A compensation payment under Regulation 17 will reflect the value of the agency to a hypothetical purchaser at the date of termination. It must be assumed that the agency would have continued, and hypothetical purchaser would have been able to take over the agency and perform it properly. Whilst this is not a straightforward calculation and many different factors must be considered, the valuation will always be related to the income stream which was likely to be generated by the agent.

There are various methodologies which can be used to carry out the valuation, and advice from an expert forensic accountant will be required on the appropriate method of valuation if court proceedings are issued.

A common methodology which is applied is the capitalised earnings approach. This looks at the net maintainable earnings of the agent, to which an appropriate multiplier is applied. The net maintainable earnings take into account historic commission income in order to assess the likely future trading performance of the agency.

The expenses the agent incurs in running his agency have to be taken into account during the valuation process. Those expenses include overhead costs and a notional labour cost which takes into account the overall time devoted by the agent to the agency.

Future earnings are discounted by an appropriate rate of interest, and account must be taken of whether the market for the products in which the agent dealt was expanding or declining. The value of the agency will be reduced if the principal's business is expected to cease, since no hypothetical purchaser would pay anything for the right to earn future commission on sales if those sales would be nil. The ability of the agent to compete with the hypothetical purchaser after termination will also be a relevant factor.

The appropriate multiple will reflect the specific risks associated with the agency, and in particular, the risk that the projected income stream will not continue. The lower the risk associated with the projected income stream, the higher the multiple which is likely to be applied. Typically, the court has applied multiples of between two and five.

The capitalised earnings approach may not be appropriate is method of valuation for all agencies, particularly where the agent earns a low level of commissions, and an alternative methodology may be more appropriate. Understanding the agent’s business and the industry within which the agent and principal operate is critical to the valuation.

An agent whose contract has been terminated is advised to seek specialist advice on their individual circumstances.