Melanie and Graham are two members of a business called Jolly Roger CC$,$ which they

started $12$ years ago and actively run together. Melanie owns $20\%$ interest in the

business, and Graham owns $80\%$ of the business. Jolly Roger CC is a franchised.

marine travel agency business providing consultations and travel services to an

established corporate client base.

The business owners have decided that they would like to enter into a buy$-$and$-$sell

agreement and have approached you for advice.

$1\mathrm{.}1$ Melanie and Graham believe the current business value is R$9,000,000\mathrm{.}00.$ They

have however, asked you to use a suitable business valuation method to determine the

actual value of the business. The CC does not own any fixed assets or equipment. The

net current assets are valued at R$14,000\mathrm{.}00.$ The expected net future earnings of the

business is R$850,000\mathrm{.}00$ per year. A fair rate of return for an investment in a similar type

of business would be $12\%.$ The current low$-$risk rate of return is $8\%.$

$1\mathrm{.}1\mathrm{.}1$ Explain what business valuation method you will use in this scenario. $(3)$

$1\mathrm{.}1\mathrm{.}2$ Calculate the value of the business and each member's interest in the business

using the stated valuation method.

$1\mathrm{.}2$ Melanie and Graham have decided to acquire life cover policies to fund the buy and$-$sell agreement. Assume for calculation purposes that the business value has been established as R$9,000,000\mathrm{.}00$ and explain to them how the policy ownership and life cover amounts need to be structured.

$1\mathrm{.}3$ Would the answer to question $1\mathrm{.}2$ differ if Melanie and Graham were married? No

calculations or recalculations are required.

$1\mathrm{.}4$ Explain to Melanie and Graham what the capital gains tax $($CGT$)$ implications would be of $($a$)$ the life cover policies as well as $($b$)$ the sale of the business interest in the event of one of them passing away. Assume that the business value has been established as R$9,000,000\mathrm{.}00.$

$1\mathrm{.}5$ What would the position be if Graham had to pass away before the buy$-$and$-$sell agreement and life policies were in place? Explain the options and risks that Melanie would encounter in such an event.