When is an offer a reasonable substitute of value?

In a recent commercial litigation matter, we were asked to consider whether an offer for the business was a reasonable reliable reflection of the fair market value of the business and a reasonable substitute for the value of the entity.

Often, there is uncertainty about whether a non-binding indicative offer (that may later be withdrawn) is relevant to the value of an entity when preparing a valuation for a litigation matter.

Generally, an offer received from a third party may be an appropriate basis on which to value a business if:

1. The offer is on an arms-length basis
2. The offer is genuine
3. The offer is being made for the same assets and liabilities, or business, that is being valued
4. The offer is made sufficiently close in time to the valuation date
5. The offer is based on transparent and accurate information about the business, generally verified by due diligence
6. Key terms, conditions, warranties and conditions precedent have been substantially agreed to by both parties
7. Standard commercial warranties such as the obligation to provide full, true and accurate financial information are not in breach
8. Standard commercial conditions precedent such as completion of due diligence to the satisfaction of the acquirer are either substantially satisfied or expected to be satisfied.

Even if these criteria are satisfied, the offer may not be a reliable reflection of the fair market value of the business assessed using appropriate valuation techniques. Some common reasons for this include:

1. A potential purchaser's offer may carry a premium if, for example, they are taking out a competitor.
2. The financial information used as a basis for the offer may not reflect the actual performance of the entity.
3. The stage the offer was at prior to being withdrawn, for example, before any due diligence was carried out.

It is important to keep these items in mind when reviewing or relying on offers in a valuation exercise.

Regardless of the weight given to evidence of offers for limited or general purposes, such evidence is not generally admissible as the primary valuation methodology or as the only direct evidence of value.

However, an offer that meets a number of the criteria set out above may be a relevant crosscheck to the primary valuation, depending on the offer and the specific circumstances of the proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.