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Valuing a Company? Are You Using the Right Method?

SeafrontPutting a price on companies can be a tricky business and there is more than one formula for assessing their worth. In one case, a firm of professional valuers who used the wrong method were found liable by the High Court to pay six-figure compensation to a bank which lent £1.8 million on the basis of its advice.

A company that owned two entertainment venues in a seaside town borrowed the money from the bank to enable it to purchase a third. On the basis of their turnover, the valuers advised that the three venues were together worth £4.2 million. However, the company later fell into administration and the venues were sold for £1.35 million, leaving the bank substantially out of pocket.

In upholding the bank’s claim, the Court found that the valuers had been negligent in failing to value the business on the basis of its earnings before interest, depreciation and amortization. The venues were worth about £3.5 million at the relevant time and the extent of the overvaluation was about £700,000.

The bank – which had lost about £1 million after transaction costs were taken into account – had relied upon the valuation report. However, the bank had itself been negligent in making an imprudent loan and the Court found that its compensation should thus be reduced by 40 per cent. The Court would hear further evidence before coming to a final figure as to the damages payable.