Importance of professional advice for valuing a business before sale

Darlingtons-25th-January-078The following article is provided by Debbie Serota from Darlingtons Solicitors. Debbie is an expert in advising on business sale transactions and additional content from Debbie can be found at

The majority of well drafted legal agreements for the sale or purchase of a business or company or a shareholders agreement governing how the company is to be run on a day to day basis should provide for how the company or business is to be valued in the event of a sale.

We have all seen these “expert valuer” clauses in documents and they often appear to be a fairly standard clause which people tend to skip past when negotiating a contract and don’t think of the potential impact at a later stage if the clause is not well drafted. Unfortunately this can lead to fairly serious issues.

There is a wealth of case law which considers the problems that can arise. One particular case, that comes to mind is Doughty Hanson & Co Ltd v Bruce Patrick Roe, this considers whether an expert valuation could be challenged because of an alleged mistake by the valuers.

In this particular case, a firm of accountants was appointed as valuers, but didn’t consider all relevant matters when reaching their conclusion as to the valuation of a company. Now Common sense would dictate that if a valuer makes a mistake when producing their valuation that it could be set aside, however unfortunately case law does not seem to share this view.

Mr Justice Mann was of the view that the expert determination couldn’t be challenged on this basis. The accountants who had been instructed as valuers had set out in their engagement letter that their final valuation would include all of their various assumptions and analysis as to how they had reached their conclusion. However they didn’t leave any part of their reasoning process open to scrutiny and the Judge refused to look behind the valuation. The Judge made it clear that the valuers had applied a valuation technique that was perfectly acceptable. Despite the fact that they had adopted a hypothesis that would not be used by other valuers, that wouldn’t necessarily mean they had valued something different and indeed had they adopted an erroneous hypothesis that would be a mistake which a valuer acting as an expert was entitled to make. So you can see that in this case you could end up seriously out of pocket if the valuation doesn’t match what you believe the true value of the business or company to be.

If your commercial contract doesn’t expressly provide that an expert valuers decision can be challenged then a court will only allow you to challenge on very limited grounds. The principle ground on which a party can challenge an expert determination is that the expert has materially departed from his or her instructions.

This is why it is so important that when considering whether now or in the future you will have to appoint an expert, firstly you appoint a firm of accountants that know what they are doing and secondly that your instructions to the expert, including the proposed formula which should be set out in the commercial agreement is extremely clear and detailed.

So, unless the parties have agreed to the contrary the expert does not have to give any reasons for his decision or extensive details as to how the decision was reached. There are two types of valuations which the parties can require an expert to produce, a speaking valuation which must be reasoned or a non speaking valuation which does not have to provide reasons or details as to how the conclusion was reached.

I always advise my clients that if possible to request a speaking valuation. In terms of negotiating contracts there is in my experience generally very little resistance to amendments of expert valuation clauses. If you do go for a speaking valuation then, in practice, this means that the scope for challenging the expert’s conclusions in court is increased. For example if there is manifest error, its extremely difficult to prove if a court cant look behind a valuers decision. So it is beneficial if your valuers are contractually required to provide reasons in which case they must explain the background to their conclusion and if a court thinks these reasons are inadequate they will direct the expert to provide further detail.

I worked on a case which concluded about a year ago whereby the valuer on whom our client was obligated to rely valued a plot of land approximately £3m less in value then 3 subsequent valuers. Our client was as you can imagine not best pleased. That case did have a happy ending but only because our client managed to secure a deal.

Business valuations also come into play when a party decides to sell a business although they are not necessarily contractually bound to do so.

In that case the valuation process is generally much less fraught as the parties can chose who they wish to value the business and on what terms. Although it is important to note that certain general assumptions should be taken into account when valuing a business for sale as the purchaser will be scrutinising the valuation and going through it with a fine tooth comb and looking for anyway they can to chip the price.

Its worth thinking fairly far in advance (if you can) about selling your business and getting all of your ducks in a row prior to the purchaser starting the due diligence process. For example, make sure all of your company books are up to date, all necessary filings made to companies house, the articles of association are sufficient (and up to date with the Companies Act 2006), all contracts in order and the correct structure in place.

You don’t want any nasty surprises yourself when the legal and financial due diligence process is commenced and the purchasers valuers looking through your accounts. It is preferable to have your lawyers and accountants involved with any transaction from the early stages if you can, to help things move more smoothly.

Selling or buying a business can be a fairly daunting prospect even for those who regularly carry out such transactions so it is important to know your company from the inside out and make sure it is compliant, to make sure any deal runs smoothly.