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Small Business
Valuation Methods
How to Evaluate Small,
Privately-Owned Businesses

Yannick Coulon
Small Business Valuation Methods
 Yannick Coulon

Small Business
Valuation Methods
How to Evaluate Small, Privately-Owned Businesses
Yannick Coulon
Brest Business School
ESC Bretagne Brest
Brest, France

ISBN 978-3-030-89718-5 ISBN 978-3-030-89719-2 (eBook)

https://doi.org/10.1007/978-3-030-89719-2

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022

This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and
retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc.
in this publication does not imply, even in the absence of a specific statement, that such
names are exempt from the relevant protective laws and regulations and therefore free for
general use.
The publisher, the authors and the editors are safe to assume that the advice and informa-
tion in this book are believed to be true and accurate at the date of publication. Neither
the publisher nor the authors or the editors give a warranty, expressed or implied, with
respect to the material contained herein or for any errors or omissions that may have been
made. The publisher remains neutral with regard to jurisdictional claims in published maps
and institutional affiliations.

Cover illustration: © Melisa Hasan

This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
 Preface

Valuation is the natural starting point toward buying or selling a business

or securities through the stock market. Essential in wealth manage-
ment, the valuation process allows the measurement of the strengths and
weaknesses of a company and provides a historical reference for its devel-
opment. Determining the value of a business is a complex task that is
more like abstract art than an exact science.
Moreover, the concept of company value is better defined by a range
of possible values than by an absolute and definitive dollar amount, since
each method is associated with many assumptions and sensitive variables.
Subjectivity and biases may also be obstacles to a fair valuation analysis,
a touch of behavioral finance is therefore necessary.
This book is not an academic and exhaustive list of all the existing valu-
ation models; on the contrary, it focuses on essential methods grouped
into three global approaches: the asset-based approach, the fundamental
or discounted cash flow (DCF) approach, and the comparable company
or market approach. The models explained are applicable to both small
unlisted companies and large public companies.
Ultimately, this guide provides the financial theory and valuation basics
needed to estimate the value of a small business.

v
vi PREFACE

A Practical Book
As the name suggests, this is a practical book.
Many pedagogical cases (15) and illustrations (33) underpin its prag-
matic and didactic content.
However, it also contains enough theories to satisfy an expert audience.
For example, the author guides the junior business appraiser by indi-
cating benchmarks that can be applied directly. A company appraisal
cannot reach perfection, but requires a great deal of humility and prag-
matism, especially in the small- and medium-sized enterprise segment.

The Target of the Book

This book is ideal for business owners and additional players in the busi-
ness world, legal professionals, accountants, wealth management advisers,
and bankers, while also of interest to business school students and
investors.

The Purpose of the Book

The objective is to offer the reader the necessary tools to value a small
company or—more modestly, to provide the ability to understand, give
constructive feedback, and improve an appraisal report performed by a
valuation professional.

The Limits of the Book

The book focuses on the theme of valuation.
It does not address the buyout of a business with all of its human,
legal, fiscal, or negotiating strategy components.
It establishes the fair value of an independent entity, not the price of a
controlling interest in a company benefiting from synergies.
The goal is not to deprive the business owner of the valuable advice of
a recognized expert in the field of business acquisitions.
Further, this book does not aim to cover taxation, accounting, or
consolidation principles, as there is already a multitude of high-quality
books on these subjects.
 PREFACE vii

Only chartered accountants or business lawyers are fully familiar with

the accounting, legal, or tax environment of the companies for which they
are responsible.

Practical Reading of the Book

The reader can read this book following two approaches:
In the sequential theoretical approach, the reader discovers each
method, which is accompanied by practical, small case studies.
In the pragmatic approach, readers begin directly with a synthetic
case study on Company SEGA, a golf management company. Subse-
quently, they can gradually reference the theoretical points of the previous
chapters.

A special thank you goes to Tula Weis, Executive Editor, to Uma Vinesh,
Project Coordinator at Palgrave Macmillan, and to Zobariya Jidda, Project
Manager.
Thank you to Cambridge Proofreading LLC and to Scribbr for
improving my English writing style.
Je salue aussi mes deux enfants, Samantha et Fabian.

Brest, France Yannick Coulon

 Contents

1 Enterprise Value, Company Value, and Other Essential

Financial Data 1
1.1 Definition of Two Essential Aggregates 1
1.1.1 Enterprise Value 2
1.1.2 The Fair Market Value of Equity 4
1.1.3 Case Study Showing the Differences Between
the Two Aggregates 5
1.1.4 Fundamental Equations 8
1.1.5 Market Efficiency and Behavioral Finance 10
1.2 The Strategic Positioning of a Company 12
1.3 Method Comparison and a Few Recommendations 15
1.4 Key Takeaways and Limitations 18
References and Further Reading 19
2 Asset-Based Approach to Valuation 21
2.1 The Net Worth of a Company 22
2.2 Adjusted Net Asset Value Method 26
2.2.1 Essential Income Statement Adjustments 28
2.2.2 Essential Asset Adjustments 37
2.2.3 Essential Equity and Liability Adjustments 43
2.2.4 Case Study of a Family Owned Real Estate
Investment Company 48
2.2.5 Adjusted Net Asset Value Case Study 49
2.3 The Capitalized Excess Earnings or Goodwill Method 53

ix
x CONTENTS

2.3.1 Intangible Assets and Goodwill 53

2.3.2 Implementation of the CEEM or Goodwill
Method 53
2.3.3 Goodwill Valuation Case Study 60
2.4 Key Takeaways and Limitations 69
References and Further Reading 70
3 Fundamental Value or DCF Approach to Valuation 71
3.1 Fundamental Value Definition 71
3.2 The Two-Stage DCF Method 73
3.3 Generalities on the Forecast and Scenarios 76
3.4 Free Cash Flows 79
3.4.1 Free Cash Flow to the Firm 79
3.4.2 Free Cash Flow to Equity 81
3.4.3 Company SEGI’s Free Cash Flows Case Study 82
3.4.4 Free Cash Flow Summary 87
3.5 Cost of Equity 87
3.5.1 The Methods Used 88
3.5.2 The Issues and Ambiguities of the Risk
Premiums 90
3.5.3 Estimated Cost of Equity for a Small Business 91
3.5.4 Implementation of the Build-Up Method 94
3.6 Weighted Average Cost of Capital (WACC) 97
3.7 Dividend Discount Model 100
3.8 DCF Case Study (Company SEGY) 101
3.8.1 Free Cash Flows and Assumptions 101
3.8.2 Indirect DCF Method 102
3.8.3 Direct DCF Method 105
3.8.4 Estimated Equity Value 106
3.9 Key Takeaways and Limitations 107
References and Further Reading 107
4 Market Approach to Valuation 109
4.1 Precedent Transaction Analysis 110
4.2 The P/E Multiple Approach 110
4.2.1 Potential Valuation Case Study 112
4.2.2 P/E Dynamics 113
4.2.3 P/E Limitations 117
4.3 The EV/EBITDA Multiple Approach 118
4.4 Other Comparative Valuation Approaches 120
 CONTENTS xi

4.4.1 The Price-to-Book Value Multiple 120

4.4.2 Cash Flow Multiples 121
4.4.3 Valuation with a Non-Financial Multiple 121
4.5 Market Multiple Adjustments 122
4.6 Case Study with the P/E and EV/EBITDA Multiples 123
4.6.1 Company Y’s Financial Data 123
4.6.2 Comparison Between the P/E and EV/EBITDA
Multiples 124
4.6.3 Equity Value Calculation with the Two Sector
Multiples 125
4.6.4 Equity Value Calculation with the Leader
Multiples 126
4.6.5 Equity Value Calculation with the Laggard
Multiples 126
4.6.6 Equity Value Overview 127
4.6.7 The Business Valuation Professional’s Decision 127
4.6.8 The Drawbacks of Historical Averages 128
4.7 Key Takeaways and Limitations 129
References and Further Reading 130
5 FullValuation Case Study (Company SEGA) 131
5.1 Generalities on the Applied Valuation Methods 132
5.2 Presentation of Company SEGA 134
5.3 Adjusted Net Asset Value 138
5.3.1 The Adjusted Net Asset Value Method 139
5.3.2 The CEEM or Goodwill Method 141
5.3.3 Asset-Based Equity Value Estimates 146
5.4 Discounted Cash Flow Methods 146
5.4.1 Valuation According to the Optimistic-Case
Scenario 147
5.4.2 Valuation According to the Pessimistic-Case
Scenario 150
5.4.3 DCF Value Estimates 153
5.5 Precedent Transaction Analysis and Market Multiple
Valuation 153
5.5.1 Precedent Transaction Analysis 153
5.6 Adjusted P/E Multiple 154
5.6.1 Dividend Discount Model 155
5.6.2 EV/EBITDA Multiple Valuation 157
xii CONTENTS

5.6.3 Market Value Estimates 157

5.7 Estimated Equity Value of Company SEGA 158
5.7.1 Results 158
5.7.2 The Valuation Professional’s Decision 159
References and Further Reading 160

General Bibliography, Webography, and Further Reading 163

Index 165
 About the Author

Yannick Coulon has 15 years of banking experience with the Suez Group
in France and UBS in Switzerland, and 10 years of experience with
Iomega Corp as a Product Manager for the Zip drive in Europe.
Yannick also teaches finance, including behavioral finance, at a business
school in Brittany, France (BBS). He also teaches at ENSTA Bretagne, an
engineering and research group.
He owns and manages four golf courses with his brother Emmanuel in
western and southern France.
He, therefore, has dual experience in teaching and managing small
private companies.
He has previously written five books:

– Le guide pratique de la valorisation d’une PME, Gualino, April 2021

– Rational investing with ratios, Palgrave MacMillan, Jan 2020
– L’essentiel des ratios financiers, Maxima, 2018
– Guide pratique de la finance d‘entreprise, Gualino, 2017
– Guide pratique de la finance comportementale, Gualino, 2016

www.linkedin.com/in/yannick-coulon-auteur-finance.

xiii
 List of Figures

Fig. 1.1 Enterprise value and equity at FMV 6

Fig. 1.2 The five companies A, B, C, D and E at fair market value 7
Fig. 1.3 The cash flows and their corresponding aggregates 9
Fig. 1.4 The Michael E. Porter’s matrix 13
Fig. 1.5 The main features of the three valuation approaches 16
Fig. 1.6 Valuation process 16
Fig. 2.1 Balance sheet uncertainties in valuation 23
Fig. 2.2 Adjusted equity methodology 27
Fig. 2.3 ANAV method 28
Fig. 2.4 Tangible and Intangible assets 55
Fig. 2.5 Excess earnings overview 57
Fig. 2.6 Total equity methodology 58
Fig. 2.7 Excess earnings duration and type 61
Fig. 2.8 Intangible equity value calculation with the NPV function
on Microsoft Excel 65
Fig. 3.1 Present value and discount rates 72
Fig. 3.2 DCF calculation (5-year forecast) 74
Fig. 3.3 DCF method used for the EV or equity value calculation 75
Fig. 3.4 The two main free cash flows 79
Fig. 3.5 Non-cash working capital investment (from year n to year
n + 1) 85
Fig. 3.6 FCFF and FCFE definitions 87
Fig. 3.7 Estimated cost of equity per size of company 95
Fig. 3.8 Build-up method and the small business risk premiums 95
Fig. 3.9 The WACC formula 97

xv
xvi LIST OF FIGURES

Fig. 3.10 Estimated WACC for different levels of risk 100

Fig. 3.11 SEGI’s EV calculation 104
Fig. 3.12 SEGI’s equity value calculation 106
Fig. 4.1 Trailing and forward P/E 111
Fig. 4.2 Risk factors and their effects on the P/E 118
Fig. 4.3 EV and Equity at FMV 119
Fig. 4.4 Overview of Equity Value Estimates for Company Y 127
Fig. 5.1 The 4 key aggregates of the balance sheet 132
Fig. 5.2 Free Cash Flows used for the calculation of SEGA’s EV
(Optimistic Scenario) 150
Fig. 5.3 Free Cash Flows used for the Calculation of SEGA’s EV
(Pessimistic Scenario) 152
 List of Tables

Table 2.1 Balance sheet of Company New Growth, in £1,000 24

Table 2.2 New growth’s net operating assets, in £1,000 24
Table 2.3 New Growth at Fair Market Value, in £1,000 25
Table 2.4 Epsilon’s income statement, in euros 32
Table 2.5 Modified income statement of Epsilon showing
EBITDA, in euros 32
Table 2.6 Epsilon’s adjusted income statement 36
Table 2.7 Company SEGI’s balance sheet, in e 50
Table 2.8 SEGI’s Income Statement, in e 50
Table 2.9 SEGI’s normalized income statement, in e 51
Table 2.10 SEGI’s adjusted balance sheet, in e 52
Table 2.11 Euphoria’s simplified income statement, in $ 61
Table 2.12 Euphoria’s adjusted balance sheet with the ANAV
Method, in $ 62
Table 2.13 Overview of Goodwill estimates 68
Table 2.14 Euphoria’s new Balance Sheet Incorporating Intangible
Assets 68
Table 3.1 SEGI’s operating cash flow forecast, in e 82
Table 3.2 SEGI’s operating cash flow forecast, in e 83
Table 3.3 SEGI’s investment forecast, in e 83
Table 3.4 SEGI’s investment ratios 84
Table 3.5 SEGI’s free cash flow to the firm, in e 84
Table 3.6 Borrowing plan and loan repayment schedule, in e 86
Table 3.7 SEGI’s FCFE, in e 87
Table 3.8 Adjusted betas, sector risks and D/E ratios 92

xvii
xviii LIST OF TABLES

Table 3.9 Possible adjusted equity risk premiums 93

Table 3.10 Deviations of adjusted equity risk premiums around
a D/E of 50% 93
Table 3.11 Possible risk premiums 94
Table 3.12 Possible cost of equity, from the lowest to the highest
discount rate 94
Table 3.13 Optimal D/E ratio 98
Table 3.14 Range of possible WACC 98
Table 3.15 SEGI’s FCFF 101
Table 3.16 SEGI’s FCFE 102
Table 4.1 Alpha’s balance sheet, book value, $, in millions 114
Table 4.2 Beta’s balance sheet, book value, $, in millions 114
Table 4.3 Alpha and beta financial ratios, $, in millions 114
Table 4.4 Alpha and beta adjusted P/E, $, in millions 115
Table 4.5 Trailing/Forward P/E and the Growth Potential 116
Table 4.6 Price or EPS adjustments when interest rates rise 116
Table 4.7 Market data and ratios for the 4 companies, A, D, C,
and Y, in $ million 124
Table 4.8 Comparison between the P/E and EV/EBITDA
Multiples 125
Table 5.1 SEGA’s balance sheet, in e 135
Table 5.2 SEGA’s income statement, in e 136
Table 5.3 Projected SEGA’s income statement, year 1, in e 136
Table 5.4 Projected net operating cash flows, in e 136
Table 5.5 Forecast with a low level of investments required, in e 137
Table 5.6 Optimistic SEGA’s FCFF, in e 137
Table 5.7 Pessimistic SEGA’s FCFF, in e 137
Table 5.8 Normalized income statement, in e 139
Table 5.9 Adjusted balance sheet, in e 141
Table 5.10 SEGA’s Tangible assets and Tangible equity 143
Table 5.11 SEGA’s balance sheet with goodwill and total equity,
in e 144
Table 5.12 SEGA’s balance sheet with Goodwill and total equity,
in e 146
Table 5.13 Optimistic SEGA’s FCFF 147
Table 5.14 SEGA’s investments on sales ratio 148
Table 5.15 Pessimistic SEGA’s FCFF, in e 150
Table 5.16 SEGA’s investments on sales ratios 151
 CHAPTER 1

Enterprise Value, Company Value, and Other

Essential Financial Data

Abstract This chapter outlines the essential metrics utilized in valua-

tion. The core of the chapter focuses on enterprise value and equity
value. The final portion of this chapter addresses the importance of
understanding a company’s positioning and strategy as a prerequisite for
analyzing its financial statements. Several short case studies and illustra-
tions are included. Key takeaways on these metrics and their limitations
conclude the chapter.

Keywords Behavioral finance · Capital employed · Confirmation bias ·

Core and non-core assets · Efficient market · Enterprise value (EV) ·
Excess or surplus cash · Fair market value (FMV) · Financial bubbles ·
Michael E. Porter’s strategy matrix · Net assets · Net operating assets ·
Operating and non-operating assets · Strategy and positioning

1.1 Definition of Two Essential Aggregates

It is of paramount importance to understand the differences between
enterprise value (EV) and equity value.
Let us start with enterprise value.

© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2022
Y. Coulon, Small Business Valuation Methods,
https://doi.org/10.1007/978-3-030-89719-2_1
2 Y. COULON

1.1.1 Enterprise Value

Enterprise value or firm value is the fair market value (FMV) of core
operating assets. EV is also the market value of capital employed.
It seems therefore logical to focus first on the definitions of operating
assets and consequently capital employed.
Capital Employed

Capital employed is the total amount of capital that has been invested in
a company for generating its core operating profit.
By construction, this amount is equivalent to the sum of all core
operating assets of the company.

Non-core assets

Non-core assets are non-essential and non-strategic assets that are not
required for running the company’s core operations. These non-operating
assets or excess assets do not generate recurring EBITDA (Earnings
Before Interest, Taxes, Depreciation, and Amortization) or EBIT (Earn-
ings Before Interest and Taxes).
Assets such as excess or surplus cash, investments in marketable secu-
rities or non-strategic minority holdings (non-consolidated) belong to
this asset category. Land and real-estate investments can also be non-core
assets if they are not necessary for the company’s business operations (i.e.,
they were probably necessary in the past but no longer in use today or
discontinued). If sold, the net proceeds would boost the cash holdings
of the company and could be used to reduce debt. The proceeds could
also be used to pay dividends. These non-core assets may generate non-
operating income (interest or rent) and expenses (property tax) but the
net impact on the company’s bottom line is usually limited.

Net Operating Assets

The net operating assets are assets used in the operations of the busi-
ness including the operating fixed assets (tangible and intangible) and the
networking capital from operations.
Current operating liabilities are deducted from current operating assets
to form the networking capital from operations.
 1 ENTERPRISE VALUE, COMPANY VALUE … 3

Net Operating Assets = Operating Assets − Operating Liabilities

Definition of Enterprise Value

Enterprise value is commonly used as an important valuation tool by

M&A companies (Mergers and Acquisitions). The EV aggregate has also
become increasingly important for stock market analysis when using ratios
such as EV to EBITDA multiple and all its possible variations. EV multi-
ples are valuation metrics that are highly complementary to the classic
price to earnings ratio (P/E ratio).
Enterprise value is the fair market value of the core operating or busi-
ness assets of a company. It is a strong and proven concept that clearly
links operating assets, debt, and cash. It can be explained either by the
asset side or the equity side of the balance sheet, and thus it has a dual
definition.
Enterprise value can also be defined as the theoretical takeover price
of a company and is inclusive of the payoff of all capital claims (i.e.,
equity + financial debt obligations). This takeover price would allow for
the purchase of the company’s entire capital base and the repayment of
all incurred financial debt (including lease obligations), while enabling
the buyer to benefit from non-core assets (including excess cash) that
could contribute to its debt repayment. In this way, we can understand
enterprise value as the price tag of a “debt-free” company.
Enterprise value also represents the total amount of capital invested by
common or preferred shareholders, long-term or short-term debt holders,
or any additional direct or indirect long-term provider of funds to the
company. Even a short-term loan provider is considered a long-term
capital investor because short-credit facilities are typically renewed on an
annual basis.
A trade debt (under accounts payable) is not an interest-bearing debt
and should not be included in the category of capital employed. The
goal of a supplier is to deliver the goods or services that are needed
throughout the course of the business cycle, not to provide funding.
Moreover, accounts payable are already included in the calculation of the
non-cash working capital from operations (i.e., networking capital).
One area of difficulty is minority interest (non-controlling interest)
which is added to provide consistency within EV ratios. If the parent
4 Y. COULON

company’s EBITDA includes 100% of the subsidiary’s EBITDA, it seems

fair to include 100% of the complete long-term capital of the subsidiary.
It is also consistent with the dual aspect definition of EV, as 100% of the
subsidiary’s operating assets are consolidated. If minority interest were
not included on the equity and liability side, both definitions of enterprise
value would result in different and inconsistent results.
As a reminder, for a consolidated balance sheet, non-controlling
interest (NCI) or minority interest represents the portion of total capital
not directly owned by the shareholders of the parent company (NCI is
listed under the equity section).

EV is valued at fair market value

The terms market price, fair market value, market value, mark to market,
and market capitalization are used interchangeably throughout the book,
but they are clearly defined as a separate category than book value. The
term fair market value (FMV) will be used for assets outside of real-estate
properties. The underlying assumption is that is the price of an asset must
be reasonably fair and reliable, unless the asset is liquidated.
For a listed company traded on a reasonably efficient market, the
market cap can replace the fair market value of equity.
For small caps that are quoted on markets with poor liquidity, using
market cap may be problematic, and thus the term fair market value of
equity.
The term fair before market value emphasizes the fact that the market
must be efficient. In this way, the price reflects the fundamental or
intrinsic value.
With behavioral finance, however, we know that this is not always true.
The existence of speculative bubbles is a case in point, and the existence
of alpha (i.e., abnormal excess return) proves that stocks are often under
or overvalued. Therefore, the term market value remains an estimation
of the fair value of equity.

1.1.2 The Fair Market Value of Equity

Enterprise value is often confused with company value, or in other words,
it is confused with the fair market value of its equity or its market capi-
talization in an efficient market. It is crucial to note that they are not
equivalent to one another.
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"In the moat. Have you caught the big one yet?"
"Not yet."
"I'll come up and try for him this afternoon, shall I?"
"Yes."
"He says 'Yes'," said John, interpreting.
"And only just now," said Colonel Wyvern, "I was savaging my
daughter because she wanted to marry into your family!"
"What's that?" cried Mr. Carmody, and John clutched the edge of the
table. His heart had given a sudden, ecstatic leap, and for an instant
the room had seemed to rock about him.
"Yes," said Colonel Wyvern. He broke into another of his laughs, and
John could not help wondering where Pat had got that heavenly
tinkle of silver bells which served her on occasion when she was
amused. Not from her father's side of the family.
"Bless my soul!" said Mr. Carmody.
"Yes," said Colonel Wyvern. "She came to me just before you arrived
and told me that she wanted to marry your nephew Hugo."
 CHAPTER XV

I
Some years before, in pursuance of his duties as a member of the
English Rugby Football fifteen, it had become necessary for John
one rainy afternoon in Dublin to fall on the ball at a moment when
five or six muscular Irish forwards full of Celtic enthusiasm were
endeavouring to kick it. Until this moment he had always ranked that
as the most unpleasant and disintegrating experience of his life.
His fingers tightened their clutch on the table. He found its support
grateful. He blinked, once very quickly as if he had just received a
blow in the face, and then a second time more slowly.
"Hugo?" he said.
He felt numbed, just as he had felt numbed in Dublin when what had
appeared to be a flock of centipedes with cleated boots had made
him the object of their attentions. All the breath had gone out of him,
and though what he was suffering was at the present more a dull
shock than actual pain, he realized dimly that there would be pain
coming shortly in full measure.
"Hugo?" he said.
Faintly blurred by the drumming of the blood in his ears, there came
to him the sound of his uncle's voice. Mr. Carmody was saying that
he was delighted. And the utter impossibility of remaining in the
same room with a man who could be delighted at the news that Pat
was engaged to Hugo swept over John like a wave. Releasing his
grip on the table, he laid a course for the French windows and,
reaching them, tottered out into the garden.
Pat was walking on the little lawn, and at the sight of her his
numbness left John. He seemed to wake with a start, and, waking,
found himself in the grip of a great many emotions which, after
seething and bubbling for a while, crystallized suddenly into a white-
hot fury.
He was hurt all over and through and through, but he was so angry
that only subconsciously was he aware of this. Pat was looking so
cool and trim and alluring, so altogether as if it caused her no
concern whatever that she had made a fool of a good man, raising
his hopes only to let them fall and encouraging him to dream dreams
only to shatter them, that he felt he hated her.
She turned as he stepped onto the grass, and they looked at one
another in silence for a moment. Then John, in a voice which was
strangely unlike his own, said, "Good morning."
"Good morning," said Pat, and there was silence again.
She did not attempt to avoid his eye—the least, John felt, that she
could have done in the circumstances. She was looking straight at
him, and there was something of defiance in her gaze. Her chin was
tilted. To her, judging from her manner, he was not the man whose
hopes she had frivolously raised by kissing him that night on the
Skirme, but merely an unwelcome intruder interrupting a pleasant
reverie.
"So you're back?" she said.
John swallowed what appeared to be some sort of obstruction half-
way down his chest. He was anxious to speak, but afraid that, if he
spoke, he would stammer. And a man on an occasion like this does
not wish to give away by stammering the fact that he is not perfectly
happy and debonair and altogether without a care in the world.
"I hear you're engaged to Hugo," he said, speaking carefully and
spacing the syllables so that they did not run into each other as they
showed an inclination to do.
"Yes."
"I congratulate you."
"You ought to congratulate him, oughtn't you, and just say to me that
you hope I'll be happy?"
"I hope you will be happy," said John, accepting this maxim from the
Book of Etiquette.
"Thanks."
"Very happy."
"Thanks."
There was a pause.
"It's—a little sudden, isn't it?"
"Is it?"
"When did Hugo get back?"
"This morning. His letter arrived by the first post, and he came in
right on top of it."
"His letter?"
"Yes. He wrote asking me to marry him."
"Oh?"
Pat traced an arabesque on the grass with the toe of her shoe.
"It was a beautiful letter."
"Was it?"
"Very. I didn't think Hugo was capable of it."
John remained for a moment without speaking. He searched his
mind for care-free, debonair remarks, and found it singularly short of
them.
"Hugo's a splendid chap," he contrived to say at length.
"Yes—so bright!"
"Yes."
"Nice-looking fellow."
"Yes."
"A thoroughly good chap."
"Yes."
John found that he had exhausted the subject of Hugo's qualities. He
relapsed into a gray silence and half thought of treading on an
offensively cheerful worm which had just appeared beside his shoe
and seemed to be asking for it.
Pat stifled a little yawn.
"Did you have a nice time yesterday?" she asked carelessly.
"Not so very nice," said John. "I dare say you heard that we had a
burglary up at the Hall? I went off to catch the criminals and they
caught me!"
"What!"
"I was fool enough to let myself be drugged, and when I woke up I
was locked in a room with bars on the windows. I only got out an
hour or so ago."
"Johnnie!"
"However, it all ended happily. I've got back the stuff that was
stolen."
"But, Johnnie! I thought you had gone off picnicking with that Molloy
girl."
"It may have been her idea of picnicking. She was one of the gang.
Quite the leading spirit, I gather."
He had lowered his eyes, wondering once more whether it would not
be judicious to put it across that worm after all, when an odd choking
sound caused him to look up. Pat's mouth had opened, and she was
staring at him wide-eyed. And if she had ever looked more utterly
beautiful and marvellous, John could not remember the occasion.
Something seemed to clutch at his throat, and the garden, seen
indistinctly through a mist, danced a few steps in a tentative sort of
way, as if it were trying out something new that had just come over
from America.
And then, as the mist cleared, John found that he and Pat were not,
as he had supposed, alone. Standing beside him was a rugged and
slightly unkempt person clad in a bearskin which had obviously not
been made to measure, in whom he recognized at once that Stone
Age Ancestor of his who had given him a few words of advice the
other night on the path leading to the boathouse.
The Ancestor was looking at him reproachfully. In appearance he
was rather like Sergeant-Major Flannery, and when he spoke it was
with that well-remembered voice.
"Oo-er," said the Ancestor, peevishly twiddling a flint-axe in his
powerful fingers. "Now you see, young fellow, what's happened or
occurred or come about, if I may use the expression, through your
not doing what I told you. Did I or did I not repeatedly urge and
advise you to be'ave towards this girl in the manner which 'as been
tested and proved the correct one by me and all the rest of your
ancestors in the days when men were men and knew how to go
about these matters? Now you've lost her, whereas if you'd done as I
said...."
"Stay!" said a quiet, saintly voice, and John perceived that another
form had ranged itself beside him.
"Still, maybe it's not too late even now...."
"No, no," said the newcomer, and John was now able to see that this
was his Better Self, "I really must protest. Let us, please, be
restrained and self-effacing. I deprecate these counsels of violence."
"Tested and proved correct...." inserted the Ancestor. "I'm giving him
good advice, that's what I'm doing. I'm pointing out to 'im, as you
may say, the proper method."
"I consider your advice subversive to a degree," said Better Self
coldly, "and I disapprove of your methods. The obviously correct
thing for this young man to do in the circumstances in which he finds
himself is to accept the situation like a gentleman. This girl is
engaged to another man, a good-looking, bright young man, the heir
to a great estate and an excellent match...."
"Mashed potatoes!" said the Stone Age Ancestor coarsely. "The 'ole
thing 'ere, young fellow, is you just take this girl and grab her and 'old
'er in your arms, as the saying is, and never mind how many bright,
good-looking young men she's engaged to. 'Strewth! When I was in
me prime you wouldn't have found me 'esitating. You do as I say, me
lad, and you won't regret it. Just you spring smartly to attention and
grab 'er with both 'ands in a soldierly manner."
"Oh, Johnnie, Johnnie, Johnnie!" said Pat, and her voice was a wail.
Her eyes were bright with dismay, and her hands fluttered in a
helpless manner which alone would have been enough to decide a
man already swaying toward the methods of the good old days when
cavemen were cavemen.
John hesitated no longer. Hugo be blowed! His Better Self be
blowed! Everything and everybody be blowed except this really
excellent old gentleman who, though he might have been better
tailored, was so obviously a mine of information on what a young
man should know. Drawing a deep breath and springing smartly to
attention, he held out his arms in a soldierly manner, and Pat came
into them like a little boat sailing into harbour after a storm. A faint
receding sigh told him that his Better Self had withdrawn discomfited,
but the sigh was drowned by the triumphant approval of the
Ancestor.
"Oo-er," boomed the Ancestor thunderously.
"So this is how it feels!" said John to himself.
"Oh, Johnnie!" said Pat.
The garden had learned that dance now. It was simple once you got
the hang of it. All you had to do, if you were a tree, was to jump up
and down, while, if you were a lawn, you just went round and round.
So the trees jumped up and down and the lawn went round and
round, and John stood still in the middle of it all, admiring it.
"Oh, Johnnie," said Pat. "What on earth shall I do?"
"Go on just like you are now."
"But about Hugo, I mean."
Hugo? Hugo? John concentrated his mind. Yes, he recalled now,
there had been some little difficulty about Hugo. What was it? Ah,
yes.
"Pat," he said, "I love you. Do you love me?"
"Yes."
"Then what on earth," demanded John, "did you go and do a silly
thing like getting engaged to Hugo for?"
He spoke a little severely, for in some mysterious fashion all the awe
with which this girl had inspired him for so many years had left him.
His inferiority complex had gone completely. And it was due, he
gathered, purely and solely to the fact that he was holding her in his
arms and kissing her. At any moment during the last half-dozen
years this childishly simple remedy had been at his disposal and he
had not availed himself of it. He was astonished at his remissness,
and his feeling of gratitude, toward that Ancestor of his in the baggy
bearskin who had pointed out the way, became warmer than ever.
"But I thought you didn't care a bit for me," wailed Pat.
John stared.
"Who, me?"
"Yes."
"Didn't care for you?"
"Yes."
"You thought I didn't care for you?"
"Well, you had promised to take me to Wenlock Edge and you never
turned up and I found you had gone out in your car with that Molloy
girl. Naturally I thought...."
"You shouldn't have."
"Well, I did. And so when Hugo's letter came it seemed such a
wonderful chance of showing you that I didn't care. And now what
am I to do? What can I say to Hugo?"
It was a nuisance for John to have to detach his mind from what
really mattered in life to trivialities like this absurd business of Hugo,
but he supposed the thing, if only to ease Pat's mind, would have to
be given a little attention.
"Hugo thinks he's engaged to you?"
"Yes."
"Well, he isn't."
"No."
"Then that," said John, seeing the thing absolutely clearly, "is all
we've got to tell him."
"You talk as if it were so simple!"
"So it is. What's hard about it?"
"I wish you had it to do instead of me!"
"But of course I'll do it," said John. It astonished him that she should
have contemplated any other course. Naturally, when the great
strong man becomes engaged to the timid, fluttering little girl he
takes over all her worries and handles in his efficient, masculine way
any problem that may be vexing her.
"Would you really, Johnnie?"
"Certainly."
"I don't feel I can look him in the face."
"You won't miss much. Where is he?"
"He went off in the direction of the village."
"Carmody Arms," diagnosed John. "I'll go and tell him at once." And
he strode down the garden with strong, masterful steps.

II
Hugo was not in the Carmody Arms. He was standing on the bridge
over the Skirme, his elbows resting on the parapet, his eyes fixed on
the flowing water. For a suitor recently accepted by—presumably—
the girl of his heart, he looked oddly downcast. His eye, when he
turned at the sound of his name, was the eye of a fish that has had
trouble.
"Hullo, John, old man," he said in a toneless voice.
John began to feel his way into the subject he had come to discuss.
"Nice day," he said.
"What is?" said Hugo.
"This."
"I'm glad you think so. John," said Hugo, attaching himself sombrely
to his cousin's coat sleeve, "I want your advice. In many ways you're
a stodgy sort of a Gawd-help-us, but you're a level-headed kind of
old bird, at that, and I want your advice. The fact is, John, believe me
or believe me not, I've made an ass of myself."
"How's that?"
"I've gone and got engaged to Pat."
Having exploded this bombshell, Hugo leaned against the parapet
and gazed at his cousin with a certain moody satisfaction.
"Yes?" said John.
"You don't seem much surprised," said Hugo, disappointed.
"Oh, I'm astonished," said John. "How did it happen?"
Hugo, who had released his companion's coat sleeve, now reached
out for it again. The feel of it seemed to inspire him.
"It was that bloke Bessemer's wedding that started the whole
trouble," he said. "You remember I told you about Ronnie's man,
Bessemer."
"I remember you said he had remarkable ears."
"Like airplane wings. Nevertheless, in spite of that, he got married
yesterday. The wedding took place from Ronnie's flat."
"Yes?"
Hugo sighed.
"Well, you know how it is, John, old man. There's something about a
wedding, even the wedding of a gargoyle like Bessemer, that seems
to breed sentimentality. It may have been the claret cup. I warned
Ronnie from the first against the claret cup. A noxious drink. But he
said—with a good deal of truth, no doubt—that if I thought he was
going to waste champagne on a blighter who was leaving him in the
lurch without a tear I was jolly well mistaken. So we more or less
bathed in claret cup at the subsequent festivities, and it wasn't more
than an hour afterward when something seemed to come over me all
in a rush."
"What?"
"Well, a sort of aching, poignant feeling. All the sorrows of the world
seemed to be laid out in front of me in a solid mass."
"That sounds more like lobster."
"It may have been the lobster," conceded Hugo. "But I maintain that
the claret cup helped. Well, I just sat there, bursting with pity for the
whole human race, and then suddenly it all seemed in a flash, as it
were, to become concentrated on Pat."
"You burst with pity for Pat?"
"Yes. You see, an idea suddenly came to me. I thought about you
and Pat and how Pat, in spite of all my arguments, wouldn't look at
you, and all at once there flashed across me what I took to be the
explanation. Something seemed to whisper to me that the reason
Pat couldn't see you with a spy glass was that all these years she
had been secretly pining for me."
"What on earth made you think that?"
"Looking back on it now, in a clear and judicial frame of mind, I can
see that it was the claret cup. That and the general ghastly, soppy
atmosphere of a wedding. I sat straight down, John, old man, and I
wrote a letter to Pat, asking her to marry me. I was filled with a sort
of divine pity for the poor girl."
"Why do you call her the poor girl? She wasn't married to you."
"And then I had a moment of sense, so I thought that before I posted
the letter I'd go for a stroll and think it over. I left the letter on
Ronnie's desk, and got my hat and took a turn round the Serpentine.
And, what with the fresh air and everything, pretty soon I found
Reason returning to her throne. I had been on the very brink, I
realized, of making a most consummate chump of myself. Here I
was, I reflected, on the threshold of a career, when it was vitally
necessary that I should avoid all entanglements, and concentrate
myself wholly on my life work, deliberately going out of my way to get
myself hitched up. I'm not saying anything against Pat. Don't think
that. We've always been the best of pals, and if I were backed into a
corner and made to marry someone I'd just as soon it was her. It was
the principle of the thing that was all wrong, if you see what I mean.
Entanglements. I had to keep myself clear of them."
Hugo paused and glanced down at the water of the Skirme, as if
debating the advisability of throwing himself into it. After a while he
resumed.
"I was bunging a bit of wedding cake to the Serpentine ducks when I
got this flash of clear vision, and I turned straight round and legged it
back to the flat to destroy that letter. And when I got there the letter
had gone. And the bride's mother, a stout old lady with a cast in the
left eye, who was still hanging about the kitchen, finishing up the
remains of the wedding feast, told me without a tremor in her voice,
with her mouth full of lobster mayonnaise, that she had given it to
Bessemer to post on his way to the station."
"So there you were," said John.
"So there," agreed Hugo, "I was. The happy pair, I knew, were to
spend the honeymoon at Bexhill, so I rushed out and grabbed a taxi
and offered the man double fare if he would get me to Victoria
Station in five minutes. He did it with seconds to spare, but it was too
late. The first thing I saw on reaching the platform was the Bexhill
train pulling out. Bessemer's face was visible in one of the front
coaches. He was leaning out of the window, trying to detach a white
satin shoe which some kind friend had tied to the door handle. And I
slumped back against a passing porter, knowing that this was the
end."
"What did you do then?"
"I went back to Ronnie's flat to look up the trains to Rudge. Are you
aware, John, that this place has the rottenest train service in
England? After the five-sixteen, which I'd missed, there isn't anything
till nine-twenty. And, what with having all this on my mind and getting
a bit of dinner and not keeping a proper eye on the clock, I missed
that, too. In the end, I had to take the 3 A.M. milk train. I won't
attempt to describe to you what a hell of a journey it was, but I got to
Rudge at last, and, racing like a hare, rushed to Pat's house. I had a
sort of idea I might intercept the postman and get him to give me my
letter back."
"He wouldn't have done that."
"He didn't have to, as things turned out. Just as I got to the house,
he was coming out after delivering the letters. I think I must have
gone to sleep then, standing up. At any rate, I came to with a deuce
of a start, and I was leaning against Pat's front gate, and there was
Pat looking at me, and I said, 'Hullo!' and she said, 'Hullo! and then
she said in rather a rummy sort of voice that she'd got my letter and
read it and would be delighted to marry me."
"And then?"
"Oh, I said, 'Thanks awfully,' or words to that effect, and tooled off to
the Carmody Arms to get a bite of breakfast. Which I sorely needed,
old boy. And then I think I fell asleep again, because the next thing I
knew was old Judwin, the coffee-room waiter, trying to haul my head
out of the marmalade. After that I came here and stood on this
bridge, thinking things over. And what I want to know from you, John,
is what is to be done."
John reflected.
"It's an awkward business."
"Dashed awkward. It's imperative that I oil out, and yet I don't want to
break the poor girl's heart."
"This will require extraordinarily careful handling."
"Yes."
John reflected again.
"Let me see," he said suddenly, "when did you say Pat got engaged
to you?"
"It must have been around nine, I suppose."
"You're sure?"
"Well, that would be the time the first post would be delivered,
wouldn't it?"
"Yes, but you said you went to sleep after seeing the postman."
"That's true. But what does it matter, anyway?"
"It's most important. Well, look here, it was more than ten minutes
ago, wasn't it?"
"Of course it was."
John's face cleared.
"Then that's all right," he said. "Because ten minutes ago Pat got
engaged to me."

III
A light breeze was blowing through the garden as John returned. It
played with sunshine in Pat's hair as she stood by the lavender
hedge.
"Well?" she said eagerly.
"It's all right," said John.
"You told him?"
"Yes."
There was a pause. The bees buzzed among the lavender.
"Was he——?"
"Cut up?"
"Yes."
"Yes," said John in a low voice. "But he took it like a sportsman. I left
him almost cheerful."
He would have said more, but at this moment his attention was
diverted by a tickling sensation in his right leg. A suspicion that one
of the bees, wearying of lavender, was exploring the surface of his
calf, came to John. But, even as he raised a hand to swat the
intruder, Pat spoke again.
"Johnnie."
"Hullo?"
"Oh, nothing. I was just thinking."
John's suspicion grew. It felt like a bee. He believed it was a bee.
"Thinking? What about?"
"You."
"Me?"
"Yes."
"What were you thinking about me?"
"Only that you were the most wonderful thing in the world."
"Pat!"
"You are, you know," said Pat, examining him gravely. "I don't know
what it is about you, and I can't imagine why I have been all these
years finding it out, but you're the dearest, sweetest, most angelic...."
"Tell me more," said John.
He took her in his arms, and time stood still.
"Pat!" whispered John.
He was now positive that it was a bee, and almost as positive that it
was merely choosing a suitable spot before stinging him. But he
made no move. The moment was too sacred.
After all, bee stings were good for rheumatism.

THE END
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