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indicative offer (that may later be withdrawn) is relevant to the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
Generally, an offer received from a third party may be an
appropriate basis on which to value a business if:
The offer is on an arms-length basis
The offer is genuine
The offer is being made for the same assets and liabilities, or
business, that is being valued
The offer is made sufficiently close in time to the valuation
The offer is based on transparent and accurate information
about the business, generally verified by due diligence
Key terms, conditions, warranties and conditions precedent have
been substantially agreed to by both parties
Standard commercial warranties such as the obligation to
provide full, true and accurate financial information are not in
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:
A potential purchaser's offer may carry a premium if, for
example, they are taking out a competitor.
The financial information used as a basis for the offer may not
reflect the actual performance of the entity.
The stage the offer was at prior to being withdrawn, for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
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
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.
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