Basing Bonuses on Company Valuations Can Be Fraught With Difficulty
25th June 2018Back to articles
Valuing companies is an inexact science and the only real measure is what a buyer would be willing to pay for them. In one case on this topic, a businesswoman whose bonus depended on the 'fair value' of the company for which she worked faced exactly that difficulty.
The woman founded the company, a healthcare insurance intermediary business, and continued to run it after she sold it to another company. It was agreed that she would receive a bonus if either the company or the purchasing company were sold in the future, or if she passed her 55th birthday without any such sale taking place. It was common ground that the latter triggering event had occurred and that the bonus was therefore due.
Under the agreement, the size of the bonus was to be based on a percentage of the company's fair value on the date of the triggering event. An independent valuer was appointed to assess the company's worth and he arrived at a figure of £293,538. On that basis, the purchaser calculated her bonus at £111,544.
The woman launched proceedings on the basis that the purchaser had provided the valuer with false, misleading or incomplete information, with the result that he had arrived at a gross undervaluation of the company.
She had since commissioned a further professional valuation, which put the company's worth at £1,088,000, producing a bonus figure of £435,200.
In applying to strike out the woman's claim, the purchaser pointed out that it was a term of the agreement that, save in the event of manifest error, both sides would be bound by the valuer's decision. The proceedings were an attempt to circumvent that agreement and stood no real chance of success.
In opening the way for the case to proceed to a full trial, however, the High Court rejected arguments that the woman's claim was incurably incapable of proof or an abuse of process. Her argument that the valuation was a nullity, in particular, required further investigation and it was not a clear and obvious case in which the Court should exercise its discretion to summarily dismiss the claim.
Jonathan Bailey, Partner and Head of Commercial Law says "Disputes about valuations of businesses are common. When entering into a sale agreement, it is essential to ensure that you are protected if a valuer appointed by a purchaser comes in with a disappointingly low valuation. We can advise you how best to protect your interests in any sale or purchase of any business."
For information and advice contact us at any of our offices below:
Devizes – 01380 722311
Chippenham – 01249 478333
Marlborough – 01672 518620