March 17, 1995, E.C.B. No. 20/92/86 (55 L.C.R. 94)


Between: Joanne Meyer
And: Her Majesty The Queen in Right of the Province of British Columbia
as represented by the Minister of Transportation and Highways
Before: Robert W. Shorthouse, Chair*
Michael R. Grover, AACI, Board Member
Suzanne K. Wiltshire, Board Member
Appearances: R. Allan W. Trann, Counsel for the Claimant
Alan V.W. Hincks, Counsel for the Respondent
*Robert W. Shorthouse heard this matter in his capacity as Vice-Chair and prior to his appointment as Chair.



For slightly more than a decade, the claimant operated a gas station and convenience store business located beside the Trans-Canada Highway in Mill Bay, British Columbia. It was known as Mill Bay Shell and sometimes as Millstream Shell. It was not an especially modern outlet but, in its last years, it pumped a lot of gas and sold a large quantity of convenience items. It provided the claimant with an increasingly comfortable livelihood. All that came to a sudden end near the close of 1990. About that time, the respondent, in the course of a project to widen and realign the Trans-Canada Highway in the vicinity of Mill Bay, proceeded to expropriate a portion of the property on which Mill Bay Shell was situated. The claimant was forced to close her business. She has not been able to relocate it. She now seeks an order of the board fixing the compensation to be paid to her by the respondent for her alleged losses.

The claimant initially filed with the board an application for determination of compensation on January 31, 1992. In it she claimed for the costs of certain tangible assets as well as for the loss of her business and, alternatively, the loss of employment as owner-manager of Mill Bay Shell. Compensation for the tangible assets comprising inventory, equipment, supplies and clothing has been agreed and paid in the sum of $25,480.27. What the board must primarily determine on this application is the quantum of the claimant's remaining business loss. The respondent says this loss is $57,250. It has made an advance payment to the claimant in that amount. The claimant says her loss is between $160,000 and $180,000.

This is not the first decision of the board concerning Mill Bay Shell. In Nikka Developments Ltd. v. British Columbia (Minister of Transportation and Highways) (1994), 53 L.C.R. 120, the board determined the market rent for the service station property as between the sublessor, Nikka Developments Ltd. ("Nikka"), and the sublessee, Shell Canada Products Ltd. ("Shell") at and beyond the date of expropriation, and looked closely into the background, facilities and operation of the station. Several parties having separate claims before the board participated in the hearing out of which that decision arose. The claimant did not take part in those proceedings and it follows that the board must determine her claims exclusively upon its evaluation of the evidence adduced and submissions made here.

The hearing of evidence and argument in this matter took place in Victoria, B.C. on March 30 and 31 and May 2 and 3, 1994. The claimant, Ms. Joanne Hamilton-Meyer, gave evidence as to her background, her purchase and operation of Mill Bay Shell, and the impact of the expropriation upon her life and business. Mr. George H. Brenton, her spouse, also testified briefly concerning the closure of the station and the termination of the claimant's business arrangements with Shell in late 1990. Mr. Philip S. Winterbottom, C.A., C.B.V., of the chartered accountancy firm of Hutcheson Winterbottom Blower, testified on behalf of the claimant as an expert in business valuation with respect to his report dated November 16, 1993 (the "Winterbottom Report"). That report reviewed the valuation performed by the respondent's business expert as well as an earlier valuation report of June 25, 1991 prepared for the claimant by the chartered accountancy firm of Peat Marwick Thorne (the "Peat Marwick Report"). All three reports were entered as exhibits in these proceedings.

Mr. James S. McIlmoyle, a recently retired senior manager with Shell, testified on behalf of the respondent concerning Shell's business relationships with gas station operators within its network as well as his personal knowledge of Shell's involvement with Mill Bay Shell both before and during its operation by the claimant. Mr. Toby M. Symes, C.A., C.B.V., of the chartered accountancy firm of Deloitte & Touche, testified as the respondent's business expert with respect to his report dated October 8, 1991 as subsequently updated, estimating the market value of the goodwill of Mill Bay Shell (the "Symes Report").



Based upon its assessment of the oral and documentary evidence adduced, the board makes the following background findings in this matter.

2.1 The Claimant

At the time of this hearing the claimant was 51 years of age and living in Cobble Hill, B.C., not far from Mill Bay. She and her then husband had relocated there from Calgary, Alberta with their three children in 1980. The claimant's early adult life had been occupied with raising the children and looking after the family home. However, by 1980 the youngest child had reached the age of 13 and the claimant became attracted to the idea of finding work outside the home. She formed a plan to operate a gas station and, responding to an advertisement concerning Mill Bay Shell, negotiated a purchase of the business from the owners, Grant M. Garnett and Lois B. Garnett (the "Garnetts"), for $30,000. Of this amount, $7,000 was a payment on account of goodwill. Two years later, the claimant and her husband separated. She bought out his interest for $5,000, paid off some business debt, and carried on with operation of the gas bar and store uninterrupted until its closure at the end of November, 1990.

It was clear from her testimony before the board that the claimant took immense pride in the way in which, over the years, she had established her personal reputation in the local community and, through aggressive marketing, expansion and product diversification within the store, had built up the business of Mill Bay Shell. Those efforts required fairly hard work and long hours, particularly in the early years. However, as the business grew, employing more staff including family members, the claimant was eventually able to take more time off. The evidence is not entirely consistent as to how many hours per week the claimant was devoting to the business by 1990. At the hearing, she testified that she was working, on average, between 32 and 36 hours per week, whereas on examination-for-discovery she put the number closer to 40 hours per week. The board is satisfied that, by that date, hers was a somewhat less than full-time management commitment. By then, the claimant testified, she was looking to Mill Bay Shell as security for her future retirement.

2.2 The Business

The business which the claimant operated was situated at the southwestern corner of the intersection of the Trans-Canada Highway and Shawnigan-Mill Bay Road on the northern periphery of Mill Bay, a small but growing community on Vancouver Island north of the City of Victoria and south of the City of Duncan. Shortly before the date of expropriation, it was one of three service stations operating along the Trans-Canada Highway in the vicinity of Mill Bay. Regional planning considerations limited to three the number of gas stations in the area. Mr. McIlmoyle's evidence was that a Shell gas station had operated at the location continuously from as early as 1949. For some years prior to the expropriation, that operation was a legally non-conforming use of the property.

The claimant testified that, at the time she purchased the business in 1980, Mill Bay Shell was "very quaint". It comprised three aging fuel pumps on a single island and a store of about 300 sq. ft. selling confectionery items, ice cream and tobacco but really "very little of anything". Over the years the claimant built up the business and the premises expanded. For a shortlived period she carried on a towing business from the location. By about 1983 she began more active marketing. New signs and new pumps were installed, uniforms were introduced, the quality of service to motorists improved, and the claimant herself joined organizations which served as vehicles for "selling" her business within the local community. From the mid-eighties onward, Mill Bay entered a boom period of growth upon which the claimant was able to capitalize not only through increased gas sales but also through expansions of the convenience store. In 1986 the store's size was increased to about 600 sq. ft. and again, in early 1988, it was remodelled and doubled in size. In the late eighties, the claimant began selling fishing licences and tackle as well as lottery tickets. Mill Bay Shell became the focal point of, in her words, "a din of activity from morning to night". In the year or so prior to the expropriation, the station was open for business approximately 18 hours a day and employed upwards of nine staff.

The claimant's descriptions of the progress of the business are borne out by the records of sales and net income achieved over the years as reflected in the financial statements and other documents provided to the board in the course of the hearing. During the first six or so years, for a variety of suggested reasons, that progress was uneven. However, from about 1986 until 1990 when the station closed, Mill Bay Shell's business performance consistently demonstrated growth. The volume of fuel sales rose from 2,099,700 litres in calendar 1986 to 3,021,475 litres in 1989 and 2,951,400 for the eleven months of operation in 1990. Between 1987 and 1990 revenue from fuel sales almost doubled while revenue from non-fuel sales more than tripled. Net income to the business, which for the fiscal year ending July 31, 1986 amounted to only $7,339, increased to $31,243 for 1987, $41,741 for 1988, $45,009 for 1989, and $71,602 for the fiscal year ending July 31, 1990, some four months prior to closure. Net income for the final four months of operation, without adjusting for extraordinary items of expense, was $20,123.

2.3 The Claimant's Relationship with Shell

Although the claimant purchased the business at Mill Bay Shell in 1980, it was not until several years later that her legal relationship with Shell was formalized. To account for that fact, it is necessary to say something about the chain of interests involved in the property from which the business operated.

The business was situated on lands (the "subject lands") owned by the Garnetts. Mr. McIlmoyle recalled from his years as Shell's retail representative on Vancouver Island that in 1972 the Garnetts had entered into a cross-lease arrangement with Shell for a period of ten years. Under this arrangement the Garnetts leased the subject lands to Shell which, in turn, subleased the service station back to the Garnetts and upgraded it. The cross-lease was renewed in 1982 for a period of five years. Accordingly, it was the Garnetts who held the Shell dealership during these years, even after having sold the business to the claimant.

In 1983 the Garnetts also leased the subject lands to Nikka pursuant to a head lease having a 50-year term. It was Nikka's intention to develop the subject lands for a shopping centre and, since only a small portion was actually required for the use of Mill Bay Shell, Nikka in 1987 negotiated an arrangement whereby Shell agreed to cancellation of its existing lease over the whole of the subject lands. In turn, Nikka subleased the business premises to Shell for a five-year term commencing October 1, 1987 with two options for Shell to renew for additional successive five-year terms. Monthly rent for the first term of that sublease was ultimately fixed at $3,000.

During her years of operation prior to 1988, the claimant thus paid rent in respect of her use of the business premises, first to the Garnetts, and later to Nikka. By 1987 the monthly rent payable was $1,025. In 1988 the claimant entered into her first written agreements with Shell in respect of the business. One took the form of what was called a dealer lease (the "lease"). The lease provided for a term of two years commencing May 1, 1988 and ending April 30, 1990, but it is an agreed fact that the lease should have provided for a termination date of April 30, 1991. Rent payable to Shell under the lease continued in the monthly amount of $1,025 up to the time the station closed. The claimant had no formal option to renew the lease but the board accepts, on the basis of evidence adduced during the hearing, that there was every likelihood that Shell would have agreed to a renewal had the expropriation not intervened. The evidence also strongly suggests that any such renewal would have been negotiated at a somewhat higher rent.

Other terms of the lease reveal that Shell held a significant degree of control over the claimant's tenure at the business premises. The claimant could not transfer or assign the business premises without Shell's prior consent. Mr. McIlmoyle's evidence was that, even if Shell approved a purchaser, it would only be for a one-year initial trial period. It was for Shell to give notice of any intention to renew or terminate the lease as the term expired. Shell could also terminate the lease early in several circumstances including where all or a portion of its interest in the site was expropriated or where its contract with the claimant for the supply of petroleum products was terminated for any reason. Additionally, Shell had the right to terminate the lease on 6 months' notice where it intended to reconstruct or make substantial alterations to the service station or to change its mode of operation on the site, and on 90 days' notice if it intended to discontinue the marketing of its products in the marketing territory around the service station or if it lost its own right of possession of the site. In these latter instances, Shell at its option was either to pay compensation based on a formula set out in the lease or to offer the claimant an alternative business opportunity within the Shell network. In fact, Shell did enter into a termination agreement and pay compensation to the claimant in the amount of $10,500 after the station closed. It was because of the oil company's broad termination rights that, according to Mr. McIlmoyle, Shell discouraged purchasers of leased gas station businesses within its network from paying for goodwill.

At the same time that she concluded her lease agreement with Shell, the claimant also entered into what was called a dealer sales contract. This agreement set out the conditions upon which Shell was to supply petroleum products to Mill Bay Shell on an exclusive basis, including the requirement that the claimant purchase at least a specified minimum volume of such products for resale. It also detailed the maintenance and operating standards which Shell expected the claimant to observe at the business premises. The term of the dealer sales contract was made coincident with that of the lease. As a dealer, the claimant took title to the petroleum products and profited from reselling them at a markup. Although the dealer sales contract does not address sales incentives, other evidence before the board establishes that it was the claimant's formal status from 1988 onward as a Shell dealer which entitled her to any performance bonuses offered by the oil company. The improved sales performance at Mill Bay Shell was such that, for 1989, the claimant was paid a bonus of $17,000.

The lease and dealer sales contract constituted the whole of the written agreements between the claimant and Shell. It should perhaps be observed that those documents are silent as to the claimant's operation of the convenience store, but it is not disputed that the claimant was entitled to the profits of that business.

2.4 The Expropriation and Closure of the Business

Like the rest of the local community, the claimant became aware of the respondent's plans for highway widening and realignment through Mill Bay in the fall of 1989. It was not at first clear whether those plans contemplated the closure of Mill Bay Shell. However, in anticipation of that possibility, the claimant embarked upon discussions with Shell about relocating the service station business in the immediate area. By the spring of 1990 the highway design had been finalized to the point that both Shell and the claimant knew that they would not be continuing to operate from the subject lands for much longer.

The construction phase of the highway project in the immediate vicinity of Mill Bay Shell began during the summer of 1990. It caused discomfort and disruption to the claimant's business in the form of noise, dust, occasional power outages, and traffic diversion and delay. Access to the station became difficult and some business was undoubtedly lost. These negative results were offset by new business generated from construction crews in the area and, after the end of September 1990, by closure of two competitor gas stations on the Trans-Canada Highway through Mill Bay. For a short time, as the claimant put it, she was "the only show in town" albeit by that time, on Shell's advice and with a view to closing, she was not replenishing her stock.

The respondent's expropriation of the subject lands was approved on January 11, 1991, and the vesting notice was filed in the Victoria Land Title Office on January 21, 1991. However, by an agreement reached between Shell and the respondent, Mill Bay Shell actually ceased operation on November 30, 1990. The claimant received verbal confirmation of the date of closure only about one week before it was scheduled to take place.

Shell had communicated its intention both to the claimant and, by way of written announcement, to her customers, that the station would be relocating. The claimant continued to act in the belief that this would occur. On December 3, 1990, the claimant, at Shell's request, entered into a termination agreement which she understood at the time was simply for the purpose of triggering her right to be paid compensation by Shell pursuant to the lease. However, despite its expressed intention to do so, Shell was unable to find another suitable location for a gas station in the Mill Bay area. The claimant was never offered another business opportunity within the Shell network. She suffered stress from the loss of her livelihood and has not since worked.



The parties are agreed that the claimant's leasehold interest in the subject lands establishes her as an owner under the Act. As such, she is entitled, among other things, to disturbance damages pursuant to s. 33 (1) (a) consisting of reasonable costs, expenses and financial losses that are directly attributable to the disturbance caused to her by the expropriation.

In this instance, the parties have also agreed that the claimant was unable to relocate her business following the expropriation and the board is satisfied from the evidence and submissions at the hearing that this was the case. Accordingly, s. 33 (4) of the Act is especially germane. It provides:

33. (4) Where the board determines that it is not feasible for an owner to relocate his business, there may be included in the compensation that is otherwise payable, an additional amount not exceeding the value of the goodwill of the business.

The primary issue for determination by the board in this matter is the value of the loss through expropriation of the claimant's business at Mill Bay Shell.



While the parties are agreed that the claimant's business should be valued as a going concern at the time of expropriation on a commonly accepted definition of market value, they disagree about almost everything else concerning the appropriate approach to its valuation. The areas of disagreement include the applicability of standard valuation theory, the preferred methodology for determining the amount of goodwill, the choice of historical operating results for the business, the kinds and amounts of adjustments to be made in establishing maintainable earnings of the business, and the appropriate multiplier to apply in capitalizing those earnings. The positions taken on all of these issues, which will be analyzed in turn, largely reflect the opinions expressed in the expert valuation reports: the Peat Marwick Report and the Winterbottom Report on behalf of the claimant; the Symes Report on behalf of the respondent.



5.1 The Valuation of Goodwill

Nowhere in the Act is the term "goodwill" defined, but E.C.E. Todd, The Law of Expropriation and Compensation in Canada, 2nd ed. (Toronto: Carswell, 1992), at p. 297, points out that tribunals have usually adopted the accountant's approach by equating goodwill with going concern value less the value of the assets used to carry on the business. That approach has been followed by the business experts in this matter. The Symes Report on behalf of the respondent, for example, at p. 2 has defined goodwill as being "the difference between the capitalized earnings of a business (going-concern value) and the net tangible asset value".

It was common ground between the parties that the goodwill of the business was to be determined at its fair market value. Section 31 of the Act defines market value as follows:

31. The market value of an estate or interest in land is the amount that would have been paid for it if it had been sold at the date of expropriation in the open market by a willing seller to a willing buyer.

The two business valuers called to testify in these proceedings adopted a somewhat more expansive but, in the board's view, not inconsistent definition of market value as set out at page 2 of the Symes Report:

For the purpose of our work, we define fair market value as the highest price, expressed in terms of money or monies worth, available in an open and unrestricted market between informed, prudent parties, acting at arms length and under no compulsion to transact.

5.2 The Applicability of Standard Valuation Theory

It is when applying the market value definition of willing seller and willing buyer in the open market to arrive at a price for the business that the parties substantially part company. The respondent determines the market value of goodwill at Mill Bay Shell by use of a notional valuation which assumes a hypothetical vendor and hypothetical purchaser. According to the respondent, a notional market valuation is what is contemplated under the Act. The claimant's position is that a sophisticated notional valuation, while applicable to a larger business, simply does not pertain to a small business operation on the scale of Mill Bay Shell. In the present case, the claimant says, it is more practical to determine price having regard to the value of the business to the particular owner and to a specific targeted purchaser.

Claimant's counsel invited the board to take into consideration, among other factors, the advancing age, limited business experience, and restricted location of the claimant in order to assess how disinclined she would have been to sell off the business at Mill Bay Shell for anything like the amount which the respondent has paid her. The claimant had invested ten years of her life in building up the business. It afforded her economic independence, a substantial annual income, and the opportunity to employ other family members. Few attractive investment alternatives presented themselves.

The claimant also asked the board to recognize the availability of "special interest purchasers" for this type of small business. According to the claimant's business valuer, Mr. Winterbottom, such purchasers are generally people who have accumulated some capital, possibly being laid off in their middle income-earning years from a larger company, government, or the armed forces. They may also be foreigners seeking preferential entry to Canada and attracted by the fact that this business would qualify under existing immigration entrepreneurial programs. These special interest purchasers, according to the claimant, would gravitate to a business such as that at Mill Bay Shell for the same reasons that made it appealing to the claimant herself: no requirement for special knowledge or training and the opportunity for independence, secure income, and family-based employment. They would be inclined, it is argued, to pay more than a strictly notional market valuation of the business might suggest.

In support of the above proposition, claimant's counsel referred the board to two decided cases. The first was a decision of the English Court of Appeal in Inland Revenue Commissioners v. Clay, [1914] 3 K.B. 466, which considered the statutory definitions of "willing seller" and "open market".

As to who may be said to be a "willing seller", Cozens-Hardy M.R. expressed the view at p. 473 that

… a willing seller is a person who is a free agent and can not be required by compulsory powers to sell …

and Pickford L.J. said further at p. 478:

… a willing seller means one who is prepared to sell, provided a fair price is obtained under all the circumstances of the case. I do not think it means only a seller who is prepared to sell at any price and on any terms, and who is actually at the time wishing to sell. In other words, I do not think it means an anxious seller.

In light of that discussion, it is argued, the board is entitled to examine the claimant's subjective circumstances as a free agent in assessing what value she would place on the business when offering it for sale.

As to what constitutes an "open market", the Master of the Rolls also said at p. 472:

I can see no ground for excluding from consideration the fact that the property is so situate that to one or more persons it presents greater attractions than to anybody else.

The statement would appear to contemplate the possibility of special interest purchasers willing to pay more than others in the open market.

The second case cited by the claimant was the decision of the Ontario Land Compensation Board in Schiedel et al. v. Regional Municipality of Waterloo (1982), 25 L.C.R. 190. It involved what was described as a 'Mom & Pop' retail variety store. The expropriating authority's business valuer had expressed the opinion that there was no economic goodwill in the expropriated business. At p. 191, the Board rejected that conclusion and held that there was "value to the owner" represented in the continued independence and family-based employment offered by such a business.

In the board's view, the market valuation of a business subject to expropriation, like the determination of the market value of expropriated land, is necessarily a hypothetical exercise. The business has not been exposed to the market. No actual purchase and sale has taken place. For the purposes of the Act, a willing seller and willing buyer are simply deemed to exist and to operate within an open market. The specific needs and circumstances of the particular seller are not relevant to the notional sale which is deemed to have occurred. Neither is the value of the business to be estimated at its value to the buyer, although the fact that some particular purchaser or class of purchasers might desire the business more than others need not be disregarded in fixing the price.

Valuation theory recognizes as "special interest purchasers" those who are able to realize strategic advantages from their acquisition beyond what other purchasers might obtain. These advantages may exist through economies of scale, reduced competition, access to valuable supply sources, reduced cyclical cash flow patterns, and the like: see "Principles and Approaches: The Basic Principles of Valuation" in I.R. Campbell, ed., Canada Valuation Service (Toronto: Carswell, 1993), p. 5-22E. The theory does not really appear to comprehend the kinds of purchasers described by Mr. Winterbottom.

Subsequent to the conclusion of submissions in this matter, the board in the course of rendering its decision in Nikka Developments Ltd. considered the applicability of the "value to owner" concept. Counsel for Nikka had urged the board to determine market rent for Mill Bay Shell on the basis of value to owner, that is, what a reasonable person would actually pay rather than surrender possession of the premises. At p. 133 of the decision, the board said as follows:

In making its determination of market rent for Mill Bay Shell, the board cannot be governed by considerations of value to owner but must look instead to the language of the Act.

Having concluded that a notional market valuation is mandated by the Act, the board nevertheless recognizes that, given the large number of factors that can influence value and the paucity of available comparable data to evaluate them, the exercise is still little more than an "educated guess". Even Mr. Symes under cross-examination acknowledged, in the case of Mill Bay Shell, that his was necessarily a "highly subjective" determination.

5.3 The Preferred Valuation Method

The respondent submits that the only appropriate method to use in valuing the claimant's business at Mill Bay Shell is the capitalized earnings approach. The claimant also relies to a great extent upon this approach but goes on to suggest that the use of alternative valuation methods may provide a more realistic result in this situation.

5.3.1 Capitalized Earnings Approach

The board considers that the conventional capitalized earnings approach offers the best indication of the value of this business. That approach has already found acceptance in an earlier decision of the board involving business loss: Surrey Animal Hospital Ltd. v. British Columbia (Minister of Transportation and Highways) (1993), 51 L.C.R. 37 at pp. 52-3. All three valuation reports entered as exhibits in these proceedings estimate the market value of the goodwill at Mill Bay Shell using this approach.

As described in the various expert reports, the capitalized earnings approach involves estimating the annual earnings a business can reasonably be expected to generate in future years and capitalizing that earnings stream at an appropriate multiple of earnings. In estimating maintainable earnings, consideration is usually given to the historical operating results and to the prospects facing the business. Appropriate adjustments are made to eliminate unusual items of income or expense. The capitalization rate, or its inverse the multiplier, serves as a measure of the rate of return required by prospective purchasers reflecting, among other factors, the risk inherent in achieving the maintainable level of earnings.

In employing this approach, the Peat Marwick Report on behalf of the claimant estimates maintainable earnings of $59,950 and applies a capitalization rate in the range of between 18% and 22%, equating to a multiplier of between 5.5 and 4.5 times earnings. From the resulting figure is deducted the value of the tangible assets as well as the compensation paid by Shell to the claimant upon lease cancellation. In the end result, the Peat Marwick Report calculates the value of the goodwill of the business as being between $250,000 and $270,000.

By contrast, the Symes Report on behalf of the respondent estimates maintainable earnings to be in the range of between only $25,000 and $30,000 to which it applies multipliers ranging from 3.5 to 2.5 times earnings. After the deduction of the value of net tangible assets, the capitalized earnings value produces a range of goodwill of between $51,000 and $63,500 from which the Symes Report selects as its conclusion the mid-point figure of $57,250.

The Winterbottom Report also prepared for the claimant is largely a review of the other two valuation reports. It is Mr. Winterbottom's opinion as a result of that review that the estimate of goodwill in the Symes Report is, for various reasons, far too low and the estimate in the Peat Marwick Report somewhat too high. It is particularly in the choice of multiplier that the Winterbottom Report endeavours to reconcile the opinions of goodwill value expressed in the other two reports. According to Mr. Winterbottom, making appropriate revisions to maintainable earnings and especially to the multiplier results in capitalized values for the business which range between $150,000 and $172,000. When alternative valuation approaches are also considered, the result is a final estimate of goodwill value for the business in the range of between $160,000 and $180,000. It is this opinion of value upon which the claimant ultimately relies.

Before examining more fully the parties' use of the capitalized earnings approach, the board pauses to consider the two alternative approaches to business valuation utilized by the Winterbottom Report. These were referred to, respectively, as the "rule of thumb approach" and the "discounted after-tax cash flow approach".

5.3.2 The Rule of Thumb Approach

According to Mr. Winterbottom and based upon his experience in advising vendors and purchasers of small businesses, it is not always appropriate to approach the valuation of a business as though a prospective purchaser would engage in a sophisticated investment analysis in order to decide upon an acceptable price. With a smaller business like that of Mill Bay Shell, the purchaser is primarily interested in knowing what future level of net income would likely be generated by the business. That purchaser, applying a kind of rule of thumb, would tend to overstate the achievable income by not making an allowance for the economic value associated with managing the business or for income taxes payable, but would also compensate by reducing the multiplier to perhaps 2 or 3 times anticipated annual income.

In applying this approach, the Winterbottom Report offers income projections for the business at Mill Bay Shell based on certain high and low assumptions regarding future sales increases. It projects net income for the 1991 fiscal year of between approximately $78,500 and $90,000 and derives capitalized values for the business ranging between $157,000 and $180,000 using a 2 times multiplier and between $236,000 and $270,000 using a 3 times multiplier.

While the simplicity of such an approach has an obvious appeal, it appears to the board that use of the rule of thumb method in these circumstances is based on assumptions, projections and multipliers to which it would be imprudent to accord much weight in deriving the market value of the goodwill of this business. It was demonstrated by counsel for the respondent to the satisfaction of the board, for example, that the projected increases in fuel sales upon which growth in income is partly based are unrealistic given the physical constraints within which the service station had to operate. The approach examines the business from the subjective perspective of a particular kind of purchaser, not necessarily one who is prudent and informed. It also refrains from deducting from net income any allowance for a management salary to the owner and for income tax which, for reasons set forth below, the board considers inappropriate. No adequate basis is offered to support the choice of multiplier.

5.3.3 Discounted After-Tax Cash Flow Approach

The discounted after-tax cash flow approach requires, among other things, a period by period projection of cash flow from operations. The present value of the business is determined by totalling the cash flows and applying to them an appropriate discount factor. According to the Peat Marwick Report, it is one of three methods commonly used in determining the value of an operating company. Typically it is used in situations where cash flows are expected to vary from year to year, where they are reasonably predictable, and where there is a finite period over which the cash flows will be realized.

The finite period within which the Winterbottom Report seeks to make use of this approach begins with the closure of Mill Bay Shell on November 30, 1990, and ends with the termination of the claimant's lease with Shell. Because Mr. Winterbottom proceeds on the assumption that the lease would have been extended for one further three year term, the period to be analyzed therefore ends on April 30, 1994. The Winterbottom Report estimates the resulting net after-tax cash flow of the business using the same high and low income projections that figured in his rule of thumb approach. For the 41 month period from December 1990 through April 1994, it projects total net cash flow of approximately $181,000 on the low income projection and $229,000 on the high projection. These amounts are then discounted at a 5% after-tax return. As the Winterbottom Report explains it, a 5% after-tax return is used because in December 1990, term deposits were yielding 10% but an allowance must be made for taxes payable on the income generated by the business. The resulting net yield is 5%. On this discounted after-tax cash flow basis, the value of the business is therefore estimated to be between approximately $152,000 and $192,000.

Mr. Winterbottom in his evidence at the hearing emphasized that he used this approach simply as a cross-check on the capitalized earnings approach. However, within his report, he also suggests that it may be the more realistic method because it takes into account the probability of future increased earnings in the business. Such projected increased earnings would presumably attract the attention of prospective purchasers and influence the price they would be prepared to pay.

In the board's view, this method is again based upon speculative and probably unrealistic projections of the continued growth of this business. Projections of growth are better reflected in the proper choice of a multiplier to capitalize earnings which can reasonably be said to be maintainable. The method also relies in its analysis upon the subjective circumstances of the claimant and, like the rule of thumb approach discussed above, fails to impute a management salary to the claimant. As a method of valuing the business at Mill Bay Shell, the board considers that the capitalized earnings approach is to be preferred to the discounted after-tax cash flow approach.

5.4 The Choice of Historical Operating Results

The respondent contends that maintainable earnings for Mill Bay Shell, using the capitalized earnings approach, are most appropriately determined by looking at its financial performance during the last full fiscal year of business operation ending on July 31, 1990. Prior to that year, changes in the claimant's operations, particularly the expansion of the convenience store in 1988, distort the revenue picture. Financial performance during the last four months of operation which followed the end of fiscal 1990, when highway construction was underway and the other two stations in the area were closing, is, according to the respondent, also unrepresentative.

Because, in the claimant's submission, the earnings trend at Mill Bay Shell had been rapidly upwards in the years prior to the expropriation, and purchasers are buying future income, the claimant argues that it is insufficient simply to use the earnings achieved for the 1990 fiscal year as the maintainable earnings of the business. Business performance during the final four months of operation, says the claimant, suggests that the earnings would have continued to grow into the future. In light of those results, as well as those showing solid increases in sales on a year to year basis from 1987 to 1990, the claimant argues that any calculation of maintainable earnings based on the 1990 fiscal year results should also allow for future projected increases.

It is common valuation practice to average the operating results of a business over a number of years in order to obtain an indication of its maintainable earnings. As the board has already pointed out, the net income to the claimant's business at Mill Bay Shell increased in each of the five years preceding the expropriation. All three valuation reports used the 1990 operating results, showing a net income of $71,602, rather than a weighted average for those five years as the starting point for determining net maintainable earnings of the business. The Peat Marwick Report noted at p. 7 that a review of earnings indicated a steady growth pattern with significant growth in 1990 and expressed the view that the 1990 operating results were more reflective of what could have been expected from the future operation of this business. The Symes Report concurred, stating at p. 5:

Given an increasing trend, we believe it is appropriate to determine maintainable earnings, not as an average of historical results, but rather on the basis of the financial results for its most recently reported fiscal year, that being 1990.

Such an approach has found acceptance in a compensation decision elsewhere. In Klopp et al. v. City of London (1978), 15 L.C.R. 348, the Ontario Land Compensation Board adopted the current year's earnings in valuing a business and said as follows at p. 361:

… the Board is of the opinion that a five-year weighted average should not be used when the earnings of the business showed a constant rate of growth for the preceding five years.

The Winterbottom Report, while using the 1990 operating results for purposes of analysis, suggests that the income statement for the four remaining months of operation following the end of that fiscal year might also be considered in determining maintainable earnings. After making adjustments for extraordinary accounting and legal expenses, the Winterbottom Report concludes that net income for the four month period was $36,123 and extrapolates annual income on that basis as $108,369.

In the board's view, financial performance for the period from August through November of 1990 should not serve as the basis for arriving at maintainable earnings of the business for two reasons. Firstly, the board is persuaded by the observation in the Symes Report that interim financial statements would not have been available as at the valuation date and, therefore, a knowledgeable purchaser of the business might not reasonably have agreed to earnings estimated solely on the basis of sales. Secondly, the board agrees with the respondent that the interim period in question cannot be considered representative given the presence of highway construction and the closure of other stations in the vicinity during that time.

Rather, the board accepts that, in the circumstances of Mill Bay Shell, it is appropriate to use the 1990 fiscal year results, when adjusted, as the basis for determining maintainable earnings, leaving the choice of multiplier to reflect trends.

5.5 Appropriate Adjustments to Maintainable Earnings

5.5.1 Amortization of Recorded Goodwill

All of the business valuers are agreed that, in working toward an estimate of goodwill value, the reported results of the business for fiscal 1990 require normalizing, in part, by elimination of the amortization of recorded goodwill of $350 since this is not a tangible asset. The elimination of this item has the effect of increasing the maintainable earnings of the business by $350.

5.5.2 Management Salary

The claimant invested her own time, effort and managerial skills in the conduct of the business. It was operated as a proprietorship and the income statements do not reflect a salary which would otherwise have been required to hire a manager. Standard valuation theory prescribes that the cost of managing the business, if not already accounted for as an expense in the financial statements, be deducted in arriving at the maintainable earnings of a business. The question therefore becomes whether, in determining maintainable earnings for Mill Bay Shell, the theory applies.

The respondent argues that the deduction from income of a fair and reasonable salary for the efforts of the proprietor of the business is necessary before application of the multiplier. Otherwise, it says, the value of the manager's labour is in effect capitalized and improperly added to the value of the business.

Respondent's counsel refers the board to its previous decision in Surrey Animal Hospital Ltd. Prior to expropriation, the claimant company in that case had operated a successful veterinary clinic and animal hospital. Its principal was a veterinarian carrying on her professional practice through the company. At p. 55 of the decision, the board, having accepted the capitalized earnings approach to valuation, made a deduction from maintainable earnings for a market salary for the principal.

Claimant's counsel urges the board to accept that the claimant would not discount the value of her own job when she put her business on the market. Rather, she would factor it into the asking price. Similarly, says the claimant, the sort of purchasers likely to be attracted to the business at Mill Bay Shell would be those special interest purchasers seeking to buy themselves a job and therefore unlikely to make a deduction from their offering price in respect of a management salary.

The claimant cites Ontario authority for the proposition that, when dealing with small businesses, it is not always appropriate to follow standard valuation practice and deduct a management salary.

In Plouffe v. City of Ottawa (1973), 4 L.C.R. 38, the Ontario Land Compensation Board had to decide what compensation was payable for the loss through expropriation of a family-operated grocery store business. The Board noted that the store provided a living for the proprietor and his family, but went on to observe at p. 47:

As a saleable proposition, however, the grocery store was operating at a loss on the basis of the accountant's standard practice of including a management salary and clerical wage in the operating expenses of the business in consequence of which the business had no saleable goodwill.

In deciding how to treat the question of management salary, the Board relied on a line of decisions of the Lands Tribunal of England. At p. 48, it cited the following summary from "Compulsory Purchase and Compensation", 5th ed. (1972) by Lawrance and Moore, the Estates Gazette Limited, London, England, at p. 133:

Whether a further deduction should be made for the value of the claimant's own personal services in the business must depend on the facts of the case. The Lands Tribunal have ordered such a deduction where the claimant carried on business with the aid of a manager and staff. But they refused to do so in the case of a one-man grocery business. In a later case the Tribunal expressed the view that whether such a deduction was appropriate or not must depend on the effect of the disturbance on the earning capacity of the claimant.

The Board in Plouffe held that, in the circumstances of that case, a deduction should not be made for the value of the claimant's and his family's services in the grocery store in determining the profitability of the business. It awarded the claimant in respect of permanent loss of goodwill the sum of $10,000, roughly equivalent to one year's net income without deduction of management salary.

The so-called "Plouffe exception" has been reconsidered in subsequent expropriation cases before the Ontario Land Compensation Board cited by the claimant.

In Kuiper et al. v. City of Chatham (1974), 7 L.C.R. 360, the expropriated owner operated a variety store, was unable to relocate his business, and thus made a claim for permanent loss of goodwill. The claimant's business expert maintained that the business had saleable goodwill which he valued at $15,000. The respondent's expert, after adjusting the financial statements to reflect, among other things, an economic salary for the proprietor, found the business to be operating at a loss with no saleable goodwill. The Board likened the situation in Kuiper to that in Plouffe. However, in accepting that Mr. Kuiper's business did not have goodwill in an economic sense, the Board in effect restricted the application of its earlier decision in Plouffe where no deduction had been made for a managerial salary for the owner. Nevertheless, the Board held that the owner was entitled to be compensated for disturbance damage or business loss suffered as a result of the expropriation. As a measure of that loss, the board allowed the sum of $7,000. That figure represented the average annual net profit of the owner's business over the five years preceding the expropriation without factoring in an allowance for managerial salary.

In the Klopp case, the claimant operated a successful bicycle sales and repair business. The business was displaced by expropriation and could not be relocated. In that instance both the owner's and the authority's business experts made a deduction from net income to account for an economic salary to the owner. After the deduction, the business continued to have economic goodwill. The Board, in also imputing a management salary, commented at p. 359 that the Plouffe exception applies when the earning capacity of the claimant is destroyed. It is in that circumstance that the owner's salary is not deducted from the profit and loss statement in determining profitability.

The present case before the board involving Mill Bay Shell is not one where, as in Plouffe or Kuiper, the imposition of a management salary would result in the business effectively operating at a loss with no saleable economic goodwill. Nor was this business, unlike in those other cases, dependent solely upon the labour of the sole proprietor or the proprietor's family. While the claimant's ability to earn income has clearly been adversely affected, there is no convincing evidence before the board that her earning capacity has been destroyed. In these circumstances, the board concludes that it would not be appropriate to depart from standard valuation practice. Rather, it concludes that the same consideration which governed the deduction of a market salary for the principal in Surrey Animal Hospital Ltd. applies here.

In so deciding, however, the board recognizes that in the particular circumstances of this case the claimant may have, as alternatively pleaded, a claim for the management salary which she lost when Mill Bay Shell was forced to close. Her position is not unlike that of a person wrongfully dismissed from employment where age, length of service, nature of the position, and availability of similar positions all factor into determining the amount of reasonable notice a dismissed employee would be entitled to: see Ansari v. British Columbia Hydro and Power Authority, [1986] 4 W.W.R. 123 (B.C.S.C.). In the case now before the board, the claimant was afforded very little notice -- approximately a week -- to effect the actual closure of the business. Moreover, any effort to re-establish herself in another business at a different location was conditioned by the claimant's expectation, which the board considers reasonable, that she would be relocated to a new Shell station in the vicinity. The claimant's age, general health and range of formal skills were clear impediments to the likelihood of her early re-employment elsewhere.

The board is also satisfied that there is a type of person in the marketplace who would have been willing to pay for the opportunity of purchasing the business at Mill Bay Shell not merely as an investment but as a self-employed job from which that purchaser could earn a living.

It is probable that the claimant's claim for "loss of employment as owner/manager" more properly falls within s. 33 (1) (a) of the Act, as a financial loss directly attributable to the disturbance caused by the expropriation, rather than as an item of economic goodwill within s. 33 (4). In the board's opinion, the appropriate amount of compensation payable with respect to this financial loss in the circumstances is one year's market salary.

It is necessary next to determine the amount of the market salary which is to be imputed to the claimant. That amount will be deducted from maintainable earnings in calculating business goodwill but will be added back at the end as a separate item of compensation for disturbance damage. The evidence adduced from the business experts on this issue was not particularly compelling. Mr. Winterbottom on behalf of the claimant testified that he was informed by a representative of another petroleum company, Pay Less Gas, that $30,500 would have been the average annual salary payable to its service station managers on Vancouver Island at the end of 1990. Mr. Symes testified that his discussions with a representative of Mohawk Gas led him to conclude that service station managers in Western Canada were paid between $30,000 and $40,000 per year at the time. He chose the mid-point figure of $35,000 as appropriate to Mill Bay Shell. In addition to what the experts reported, Mr. McIlmoyle testified that in 1990, Shell paid its service station commission agents a base salary of $35,000 plus incentives ranging from $7,000 to $10,000 per year.

The board has already observed that, by the time of expropriation, the claimant was occupied somewhat less than full time with her managerial duties. Based upon that fact and the foregoing evidence, such as it is, as to market salaries, the board concludes that the annual market salary to be imputed to the claimant for her managerial duties at Mill Bay Shell is the sum of $30,000.

5.5.3 Income Tax

The Peat Marwick Report on behalf of the claimant calculated the capitalized earnings of the business without making any allowance for income taxes payable on net income. The Symes Report on behalf of the respondent performed its calculations on the basis of maintainable after-tax earnings, using an income tax rate that would be expected to prevail to a purchaser of the business. The Winterbottom Report again acknowledged that deducting an amount for income taxes is in accordance with standard valuation theory and practice since such tax is a cost to the business prior to providing a return to the owner. However, as in regard to management salaries, Mr. Winterbottom's opinion was that a deduction for income tax was appropriate when dealing with larger businesses but did not reflect marketplace reality with small businesses where purchasers were inclined not to take income tax into account when analyzing profitability.

The board is unable to accept the proposition that a small business like Mill Bay Shell constitutes an exception to established practice such that valuation should be on the basis of pre-tax income. Todd, The Law of Expropriation, in the course of an extensive review of the case law on income tax implications, states as follows at p. 557:

Where the market value of a business or its goodwill is determined by reference to profits, the profits must be on an after tax basis.

In this instance the board finds that the appropriate deduction from net income for income tax is at the rate of 23.8%, being the rate of tax then applicable to small business corporations in British Columbia. Mr. Symes, who applied that rate in his report, explained that it had the effect of imposing less income tax on the business than an individual would have to pay. However, he considered, and the board agrees, that the choice of rate is justifiable since an owner such as the claimant operating as a proprietorship could have incorporated her business and rolled over its assets into the corporation without triggering any taxes.

5.5.4 Rent

At the date of expropriation, the claimant was continuing to pay Shell the sum of $1,025 per month on account of rent for the Mill Bay Shell premises. Had the business been able to continue in operation, the lease would have expired on April 30, 1991. Assuming, as the board does, that a prospective purchaser would have required a lease in place and that the lease would have been renewed, the question becomes at what level of rent would it have been renewed. Any increase in rent would be reflected as a downward adjustment to maintainable earnings.

There does not appear to be any dispute over whether a rental increase would have occurred. The Peat Marwick Report on behalf of the claimant adjusted estimated maintainable earnings downward by $12,000 to reflect what it considered to be the potential rent increase. This represents a 100% increase in rental expense over what was incurred in the 1990 fiscal year. The Winterbottom Report, in reviewing that adjustment, considered the increase too high and suggested that a 25% increase, amounting to $3,000 annually, would more realistically have been negotiated in the circumstances. The Symes Report on behalf of the respondent made no mention of a rent adjustment and the respondent simply argued that there should be such an adjustment without attempting to quantify it. Testifying for the respondent, Mr. McIlmoyle suggested that several factors might have entered into the negotiation of a rent increase to the claimant. One was the growing profitability of the claimant's operation in which, he said, Shell would seek to share. Another was the upcoming negotiations with Nikka over Shell's own sublease of the service station property in which a rent increase could also be anticipated. A third was the prospective cost to upgrade the station environmentally which, if to be borne by Shell, the oil company would seek to have reflected in part in a higher rent to the claimant.

The board accepts the relevance of the above factors and is of the view that, considering the modest rent which the claimant was paying in 1990, a rental increase on renewal of the lease would not reasonably have been less than 25%. Based upon the evidence before it, the board concludes that there should be a downward adjustment from maintainable earnings of $3,075 on account of rent.

5.5.5 The Performance Bonus

In the late 1980s when the claimant entered into her dealer sales contract, Shell had in place an incentive scheme whereby it paid to its dealers a bonus based upon volume increases in sales over an agreed minimum level. The claimant sold approximately 500,000 litres more of fuel in the 1989 calendar year compared with 1988. This was a substantial increase and Shell paid the claimant a bonus of $17,000. That bonus appears as revenue in the financial statements for the 1990 fiscal year and accounts for much of the large rise in net income from $45,009 in 1989 to $71,602 in 1990. The business valuers appear not to have identified this extraordinary item at the time they prepared their respective reports. The question is whether the bonus was sustainable or whether it should be deducted in arriving at maintainable earnings.

The claimant submits that the trend of fuel sales during the eleven months of operation in 1990 points to a further increase of perhaps 200,000 litres for that year had the station not closed. Accordingly, it is argued, some figure ought to be inserted into maintainable earnings acknowledging that the claimant would have had a bonus in the 1991 fiscal year but for the expropriation of her business. Moreover, Mr. Winterbottom in his expert testimony on behalf of the claimant expressed the view, based on his analysis of projected future sales, that the claimant would have been able to maintain earnings at or above the level achieved in 1990 even without receipt of the bonus.

Based largely on the evidence of Mr. McIlmoyle, the respondent submits that there was no guarantee that the bonus would continue to be paid as the threshold level was reset each year and the program ultimately dropped by Shell. Mr. Symes in his testimony said that, if he had been aware of the bonus component when he wrote his report, he would have adjusted maintainable earnings downward by deleting it.

The board concludes that full recognition cannot be given to the $17,000 bonus when estimating maintainable earnings as this was an extraordinary item based on an unusually large increase in fuel sales during one year. At the same time, the board is of the view that, but for the expropriation and closure of the station, the claimant would probably have been entitled to some incentive benefit, whether by bonus or otherwise, for improved sales performance in 1990 and beyond. The board considers that, in all of the circumstances, maintainable earnings should be reduced by deducting $11,000 of the $17,000 bonus credited to the 1990 fiscal year.

5.5.6 Lottery Sales

In testimony before the board, the claimant stated that she was guaranteed a 5% profit from the B.C. Lottery Corporation on the sales of lottery tickets at Mill Bay Shell. During the 1990 fiscal year, the claimant realized lottery sales of $68,181. Based upon the guaranteed margin, the profit from such sales would have amounted to approximately $3,409. However, the 1990 income statement for the business indicates a net loss of $1,169. The claimant maintains that this discrepancy was essentially a cut-off problem in reporting the financial data since she had a large inventory of tickets on hand at the end of the 1990 fiscal year. In the claimant's submission, this explanation is supported by the fact that the first four months of the 1991 fiscal year show a profit of approximately $3,000 on sales of only $23,000 between August and November of 1990.

The respondent does not dispute the claimant's evidence as to her guaranteed profit margin on lottery sales, nor does it take issue with the likelihood that the loss reflected in the 1990 income statement resulted from a timing problem. In commenting on this anomaly, the respondent merely points out that cut-off adjustments have been ignored generally in all of the valuation reports, and that it would be imprudent to adjust for this one item without adjusting for others.

The board accepts that the claimant made a profit on her lottery operations in 1990 and, notwithstanding that no attempt was made by either party to adjust for other possible cut-off problems in the income statement for that year, that profit should be factored into the maintainable earnings of the business. Accordingly, it considers that the sum of $4,500 as suggested by the claimant should be added to maintainable earnings on this account.

5.6 Net Maintainable Earnings

Through the foregoing analysis, the board has concluded that net maintainable after-tax earnings of the business at Mill Bay Shell amount to $24,775. This number has been reached by starting with 1990 net income of $71,602, by deducting therefrom $30,000 as an appropriate management salary, $3,075 on account of increased rent, and $11,000 of the recorded $17,000 bonus, and by adding in $350 to eliminate the amortization of recorded goodwill and $4,500 to reflect the profit on lottery sales. Income tax payable has been calculated at the rate of 23.48% for a further reduction of $7,602.

5.7 The Capitalization of Earnings: The Risk Factor

The selection of an appropriate multiplier to capitalize the maintainable earnings of a business is, in large part, a function of risk. It is the inverse of the rate of return that a willing vendor and willing purchaser would consider acceptable in the circumstances. The evidence suggests that, in 1990, a risk free investment in the nature of a guaranteed investment certificate returned 10% before tax, which converts to a 10 times multiplier.

The respondent contends that the major risk to the claimant's business at Mill Bay Shell was the significant level of control which Shell could exercise over the business. The respondent points to Shell's wide-ranging rights to terminate the lease, to govern the supply and price of gas, and to replace the dealer relationship with an arrangement more akin to that of an employer and employee. According to the respondent, Shell was motivated to redevelop and expand the service station property, if possible, in order to remain competitive in the local marketplace. One result of such expansion might have been to jeopardize the claimant's dealer status. Shell's control, in the respondent's submission, posed a considerable risk not only to the claimant but also to any potential purchaser of the business. It argues for use of a low multiplier in capitalizing business earnings at Mill Bay Shell.

The Symes Report on behalf of the respondent recognized the growth, stability and diversity of the operation at Mill Bay Shell in the years prior to expropriation as positive indicators in the selection of a multiplier. However, in addition to the oil company control issue, it also cited as negative factors what it characterized as the relatively poor state of the economy in 1990, the fact that the service station did not offer repair services which in its view might have commanded more goodwill, and instances of sales of service station businesses in the Lower Mainland of British Columbia where payment on account of goodwill was far lower than what the claimant has suggested is appropriate for Mill Bay Shell. It was in weighing such considerations that the Symes Report arrived at a range of multipliers of 2.5 to 3.5 times earnings. These represent rates of return of 40% and 28.6% respectively.

The claimant disputes the respondent's assertion that the business was in a tenuous situation and subject to the whims of Shell. Notwithstanding the control which Shell could theoretically exercise under the lease and dealer sales contract, the facts as they existed in 1990, according to the claimant, militated against any termination of the existing relationship. Shell's long-standing commitment to the site, its nominal investment in the station, and the profit it derived from ever-increasing fuel sales, afforded little incentive to make a change. In the claimant's submission, this de facto security of tenure, combined with the strong earnings potential of the business in a growing and prosperous community, reduced the risk attached to the maintainable earnings. These factors, says the claimant, argue for the adoption of a much higher multiplier than what the respondent proposes.

The Winterbottom Report, in its own estimation of the factors bearing on the choice of a multiplier, found few negatives and many positives entering the equation. It noted as positive factors not only favourable location and rapidly increasing sales and net income, but those features said to be attractive to special interest purchasers such as the opportunity to employ family members or to qualify under the Immigration Entrepreneurial Program. It considered the backing of a major fuel supplier to be a positive factor and did not expressly consider whether the control inherent in that relationship ought to be seen as a risk. Only the relatively short term of the lease and the long hours of operation required for the business were listed as negative factors. The Winterbottom Report recommended a range of multipliers of between 4 and 5 times earnings as appropriate to Mill Bay Shell. These equate to rates of return of 25% and 20% respectively.

The board's task in selecting a multiplier to capitalize the earnings of a business is a somewhat elusive exercise, made particularly difficult by a general lack of available evidence on comparable businesses. Business valuers, in order to preserve client confidentiality, generally ask the board to rely on their unsupported assertions of what in their professional experience constitutes an appropriate capitalization rate or price earnings multiple for a particular business.

Mr. Winterbottom in his report identified fifteen types of businesses for which he had performed valuations. He testified that in his experience the multiples had ranged from 2.5 to 5.5 times earnings. However, under cross-examination at the hearing, he was able to recall only one -- a feed mill business -- where he considered the risk to have been less than at Mill Bay Shell even though several of the other businesses were situated on lands actually owned by the operator.

For his part, Mr. Symes was unable to go much beyond acknowledging that multipliers used in past transactions form a body of evidence which is useful to the business expert in subsequent valuations. Both Mr. Winterbottom and Mr. Symes had performed valuations of fuel oil delivery businesses, and Mr. Symes reported that in his opinion, evidently contrary to that of Mr. Winterbottom, such businesses were less risky than a service station business. Although the Symes Report made mention of two recent sales involving service stations where the goodwill value of the businesses had been established at between $65,000 and $75,000, it became apparent during the hearing that Mr. Symes had done little to inform himself about those businesses so as to be able comment on their comparability to Mill Bay Shell.

In the only other decision by this board to date involving a business valuation, Surrey Animal Hospital Ltd., the board reviewed the case law from other jurisdictions which indicated that multipliers and capitalization rates used to calculate the value of goodwill in various circumstances have been subject to considerable variation. The claimant in that instance was fee simple owner of the expropriated property. The business had only been in operation for somewhat less than two years but was profitable and expanding. Its continued success seemed clearly contingent upon the direct professional involvement, energy and special skills of the veterinarian herself. At p. 58, the board said:

In doing what it can to recognize and weigh all of the factors in this case that bear upon the market value of the business goodwill, … the board finds that a multiplier of 3.0 is fair and reasonable to apply to the net maintainable earnings …

In the present instance, the board is of the view that the respondent has somewhat overstated the risk associated with the claimant's operation of the business at Mill Bay Shell. The business was long-established in the area and the claimant herself had been at its helm for more than 10 years. Her management efforts were important to building the success of the station but its continued viability seemed assured even as she reduced her direct involvement in its day to day operations. It was well located within the local market although the physical and legal limitations of the small site indicated that it might in the not too distant future reach its capacity for gas sales. Nevertheless, the business was growing and increasingly profitable. Neither the control exercisable by Shell nor the possibility of future competition detracts from the likelihood that a prospective purchaser would find much to commend it. Having given due consideration to all of the evidence and submissions bearing upon this aspect of the matter, the board concludes that a multiplier of 3.75 should be applied to the net maintainable earnings of the business.

5.8 Deductibility of the Termination Settlement with Shell

As previously noted, the claimant's lease with Shell included a provision to compensate her as dealer where Shell had to terminate the lease because it had lost its own right to possession of the service station site and where, additionally, the oil company provided her with no alternative and equivalent business opportunity. The formula for determining that compensation was set out in a schedule attached to the lease. It provided for payment, up to a specified maximum, of 5% of the net profit before tax of the last operating year of the business, multiplied by the number of years during which she had operated as an accredited dealer.

A signed copy of the termination agreement dated December 3, 1990, between the claimant and Shell with respect to the dealer sales contract and dealer lease was entered as an exhibit in these proceedings. At the date of termination, the claimant had enjoyed the status of dealer for only three years and, based upon the net profits of approximately $71,000 which she realized in the 1990 fiscal year, received compensation from Shell in the amount of $10,500.

During the course of the hearing, the respondent argued that any compensation payable by the respondent under s. 33 (4) of the Act should be reduced by the amount of compensation she received from Shell. The claimant objected that the respondent had failed to address any such set-off in its pleadings so that proper argument could be prepared. No application to amend the pleadings in this respect was made during the hearing. In any event, according to the claimant, the termination settlement was a collateral benefit paid pursuant to a private contractual agreement between the claimant and Shell to compensate her for business dislocation. On case authority, it should not be deducted from any amount awarded under the claimant's claim before the board.

The claimant cited the recent judgment of the Supreme Court of Canada in Cunningham v. Wheeler; Cooper v. Miller; Shanks v. McNee, [1994] 1 S.C.R. 360, 113 D.L.R. (4th) 1, which held that an injured plaintiff in a tort action, receiving compensation for lost wages under an employment insurance plan, should not have that compensation deducted from the amount received on account of loss of wages in a damage award against the tortfeasor.

The board accepts that the scope of the hearing is governed by the pleadings as settled between the parties. In the absence of any pleading of set-off, the board on that ground alone is not prepared to make the deduction which the respondent seeks. However, even if the board were prepared to consider the respondent's submission of set-off in the absence of a pleading, it is further persuaded that the reasoning adopted by the majority of the court in Cunningham applies here and that no deduction should be made.



The board has derived net maintainable earnings for the claimant's business at Mill Bay Shell in the amount of $24,775. It has further concluded that a reasonable multiplier to apply is 3.75 times earnings. This results in capitalized earnings for the business of $92,906. From this amount must be deducted the value of the tangible assets which, as previously indicated, were agreed at some $25,480 in order to arrive at the goodwill value of the business pursuant to s. 33 (1)(a) and s. 33 (4). This value has therefore been finally determined in the amount of $67,426.

The board has found that the claimant is also entitled to be compensated pursuant to s. 33 (1) (a) for her loss of management salary, and has determined that the appropriate amount of compensation under that head is $30,000.

Accordingly, the total compensation awarded by the board to the claimant as disturbance damages is the sum of $97,426. To date the respondent has paid to the claimant on that account the sum of $57,250. These amounts are, of course, exclusive of the agreed payment with respect to net tangible assets.



Pursuant to s. 45 (1) (b), the claimant is entitled to be paid interest compounded annually on the amount awarded for disturbance in excess of the amount paid to her by the respondent. Advance payments were made by the respondent on April 12, 1991 in the amount of $25,480.27 in respect of the net tangible assets and on January 6, 1992 in the amount of $57,250 in respect of other business loss. In this instance the board considers that no interest should accrue on the agreed compensation for the net tangible assets, but that interest on the amount unpaid from time to time in respect of the award for disturbance in the sum of $97,426 should accrue from the day following the date of closure of the business at Mill Bay Shell, which was November 30, 1990.



Pursuant to s. 44 (3), the claimant is entitled to be paid costs necessarily incurred by her for the purpose of asserting her claim for compensation, and the costs payable pursuant to ss. (7) will be her actual reasonable legal, appraisal and other costs.


THEREFORE IT IS ORDERED THAT the respondent shall pay to the claimant:

(1) $67,426 for the value of the goodwill of the business pursuant to ss. 33 (1) (a) and 33 (4) of the Act.

(2) $30,000 for financial loss incurred through loss of management salary pursuant to s. 33 (1) (a) of the Act.

(3) Interest on the amounts in items (1) and (2) from and including December 1, 1990, until paid, with adjustments to take into account monies paid by the respondent to the claimant. Pursuant to s. 45 (2) of the Act, interest shall be calculated at the following rates:

(a) Fourteen and three-quarters per centum (14.75%) from December 1, 1990 to December 31, 1990;

(b) Twelve and three-quarters per centum (12.75%) from January 1, 1991 to June 30, 1991;

(c) Nine and three-quarters per centum (9.75%) from July 1, 1991 to December 31, 1991;

(d) Eight per centum (8.00%) from January 1, 1992 to June 30, 1992;

(e) Seven per centum (7.00%) from July 1, 1992 to December 31, 1992;

(f) Seven and one-quarter per centum (7.25%) from January 1, 1993 to June 30, 1993;

(g) Six per centum (6.00%) from July 1, 1993 to December 31, 1993;

(h) Five and one-half per centum (5.50%) from January 1, 1994 to June 30, 1994;

(i) Eight per centum (8.00%) from July 1, 1994 to December 31, 1994;

(j) Eight per centum (8.00%) from January 1, 1995 to June 30, 1995.

(4) The actual reasonable legal, appraisal and other costs of, and incidental to, the application and hearing before the board in such amount as may be agreed upon, and failing such agreement in such amount as may, upon application to the board, subsequently be determined and allowed by the chair.


Government of British Columbia