Restaurant co-owner wins appeal over valuation of shares

The co-owner of a restaurant has won her appeal to overturn an inaccurate valuation of the company’s shares by an independent expert.

The issue arose because the restaurant had two co-owners who had equal shareholdings. A dispute arose and it was agreed that the best solution was for one shareholder to buy out the other at a price to be determined by an independent expert valuer.

The instructions to the expert stated that he was to have access to all the records and documents in the company’s control, including “”any handwritten takings””.

The expert valued the company by applying a multiplier to maintainable income. He calculated the maintainable income from the company’s profit and loss accounts, and did not consider the figures set out in handwritten takings.

The “seller” shareholder provided the expert with an accountant’s report which analysed the handwritten takings by comparison with the trading accounts, and concluded that the trading accounts were significantly understated.

However, the expert stated that he had to assume that the trading accounts were reliable unless a jointly appointed forensic accountant determined that they were not.

The seller took legal action, saying that by failing to consider the handwritten takings, and adopting the view that he had to rely on the trading accounts, the expert had disregarded his mandate and had undervalued the business.

The Court of Appeal ruled in favour of the seller. It held that a fair valuation of the business had to refer to all the books and records, including the handwritten takings. The valuer had not properly followed his instructions and his valuation should be set aside.

Please contact Jon Alvarez if you would like more information about the issues raised in this article.