Australia: The art and science of business valuation

Expert matters
Last Updated: 24 September 2013

Soia v Bennett [No5] [2012] WASC 289 (21 December 2012)

How do you value a joint venture when the parties did not enter into a written agreement setting out the nature of the business operations, the parties' interest in the joint venture or the parties' obligations?

In this edition of Expert Matters Kellie Badge, Associate Director in our Melbourne office discusses a case which considers expert evidence provided in the area of business valuation.


Mr Kim Soia operated Personalised Tuition Services Pty Ltd ('PTS'), a successful tuition business which tutored school-aged students in Perth. Mr Martin Bennett, a prominent Perth lawyer, engaged Mr Soia's services for the benefit of his son, while Mr Soia also became a client of Mr Bennett's law firm. Emerging from their professional relationship grew a business opportunity to jointly create an online internet tuition service for students ('the Business'). Internet Tuition College Pty Ltd ('ITC') was incorporated in 1999 to conduct the joint venture project ('the JV').

The parties to the JV did not enter into a written agreement setting out the nature of the business operations, the parties' interest in the JV or the parties' obligations. A shareholders' agreement detailing profit distributions was prepared.

Mr Soia alleged that the Business venture was structured so that Mr Soia contributed his time and expertise to develop the educational content while Mr Bennett provided the financial backing. In order to fulfil his obligations, Mr Soia ceased providing his services to his PTS clients. Mr Soia also alleged that Mr Bennett made a number of representations, and that, pursuant to the expenditure listed in a budget document dated 30 June 1999, agreed to pay Mr Soia an annual management fee commencing at $200,000 in the first year in addition to a salary, while establishing the Business.

In contrast, Mr Bennett alleged that he was prepared to pay Mr Soia $250,000 per annum if and when the business was operational and successful.

In a meeting held on 18 September 1999, Mr Bennett advised Mr Soia that he was unable to provide further funding or pay the management fees. Mr Bennett ceased providing funding in September 2000 and a provisional liquidator was appointed to ITC six months later in March 2001. ITC was liquidated in 2009 after settling a lengthy intellectual property dispute.

Claims for loss in business value

Mr Soia put forward a claim for the loss of PTS' value given he ceased trading via PTS to concentrate on establishing ITC.

Assessment of loss

Accounting expert evidence to support Mr Soia's claim was produced by Mr S and Mr C for the Plaintiff and critiqued by Mr V for the Defendant ('the Experts').

We discuss five fundamental valuation methodologies that could have been considered in the calculation of the claim for loss in PTS' value, namely:

  1. Income based method – commonly applied to relatively mature businesses, future maintainable earnings are multiplied by a capitalisation factor ('multiplier') to determine the enterprise value.
  2. Market based method – valuation is based on comparable sales and similar transactions with adjustments for differences in size, quantity and quality.
  3. Discounted cashflow method –forecast cash flows are discounted using a discount rate that reflects risk to assess the net present value of a project, start-up or expanding business.
  4. Asset based method – used where net assets have greater value than the business, or the business has ceased operating. Net asset values are adjusted for time, cost and taxation on realising their value.
  5. Rule of thumb method - generally used as a check of the value assessed by application of the other methodologies. Specific rules of thumb are generally applicable by industry, for example a multiple of annual sales turnover for a supermarket or 'cents in the dollar' of annual fees for a services firm.

Mr S and Mr C prepared business valuations of PTS based on the income based method. While the income based method is often regarded as a technically inferior method to the discounted cashflow method, the lack of detailed cashflow or financial forecasts for PTS left the experts with no other option in this case.

One of the criticisms made by Mr V of Mr S's and Mr C's valuation was in relation to the use of a multiplier, which Mr V described as being "too arbitrary"1. The Court agreed with Mr V's opinion and held that the multipliers used by Mr S and Mr C were "no more than a rule of thumb to produce an estimate of the value of the business" and the methods they used were "inherently unreliable"2. The Court did not accept their evidence, concluding that the Experts:

  • did not conduct any detailed analysis of the nature of the business, the marketplace, competitors or the number of students seeking tutoring services
  • did not take into account evidence of comparative sales
  • did not consider the attractiveness of the Business to ex-school teachers who may be interested in branching into such a business3.


The key point that can be drawn from the Court's comment is the requirement for an expert to provide opinions supported by facts, research and reasonable assumptions.

As noted, the Court remarked that the use of a multiplier is "no more than a rule of thumb"4. Courts have accepted business valuations of small to medium sized privately owned businesses prepared with reference to the income based method where the multiplier has been supported with sound market and external research into the comparable businesses, industry trends, current economic climate and its impact on the industry and consumers, as well as the specifics of the business's operations and management.

In M.T Associates v Aqua-Max5 the Judge rejected the expert's evidence and his multiplier or capitalisation rate used in the income based approach, for the following reasons:

  1. He (the expert) did not look into the factors that were relevant to the exercise and was prepared to express his opinion based on a two hour inspection of the business and his previous experience.
  2. He played the advocate.
  3. When confronted with difficult questions his answers fell back on "in my experience", something the Judge felt was an inappropriate answer that is effectively a piece of 'stonewalling'.
  4. He did not do a proper and thorough investigation of all relevant factors.

Similar to Soia v Bennett, this case demonstrates, among other things, the Court's requirement for experts to provide opinions within their knowledge that are supported by relevant information, assumptions and research. The basis for opinions must be transparent.

Other considerations - accreditation of valuers

As a side point, the Court observed that there is no statutory system for the registration of business valuers such as exists for real estate valuers. Perhaps the inference was that a registered business valuer would have been more likely to provide adequate support in their choice of a multiplier. The registration of business valuers has recently been extensively debated by the accounting governing bodies. Rather than a register, the Institute of Chartered Accountants in Australia ('the Institute') is in the process of introducing a business valuation 'specialisation' that will be assigned to members who apply to receive the designation and meet the valuation education and practical experience requirements of the Institute. CPA Australia is not offering specialist designations to their members at this time.


1Soia v Bennett [No5] [2012] WASC 289 (21 December 2012), paragraph 369
2Ibid, paragraph 370
55M.T Associates Pty Ltd v Aqua-Max Pty Ltd & Ors (No.2) [2000] VSC78, paragraph 535 and 536

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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