On 27 June 2025 the Victorian Court of Appeal decided a dispute arising from a business sale in Ekera Dental Pty Ltd v Creative Smiles Pty Ltd and J Goodman.
The dispute arose from a sale by Creative Smiles to Ekera of a dental practice where the vendor was controlled and owned by Dr Goodman.
The parties agreed under a Service Agreement that Dr Goodman would work as the practice principal during an earn out period, and that he would also work as a dentist from time to time.
There was a separate Acquisition Agreement and a Services Agreement (the Services Agreement provided for post-completion support services from Ekera).
There was an earn out dependent on EBITDA (Earnings Before Interest Tax Depreciation Amortisation).
Well before the end of the earn out period Ekera ended the arrangements with Dr Goodman, advising that it would manage the practice itself for the remainder of the earn out period. Ekera blocked access to the practice accounts and changed the locks.
In the appeal, a key question was whether Dr Goodman was an employee of Ekera. The Court considered the High Court decision in JFMMEU v Personnel Contracting and in particular considered the commercial context of a sale of business. The Agreement required Ekera to respect the independence of the practice principal (Dr Goodman) and not to seek to influence professional judgment. There were also other terms tending against an employment relationship.
The Court of Appeal ultimately found that this was not an employment situation. There have been subsequent statutory provisions reinstating the multifactorial test to address the High Court decision in JFMMEU and in Jamsek, so that arrangements the contractual terms are no longer largely definitive. However, it is doubtful that would have changed the outcome here, particularly given the sale of business context.
The remaining key question was whether in the calculation of EBITDA, it was appropriate to treat some missing monies as an expense. As is usual for these things there was a statement in the contract as to the principles to be used in calculating EBITDA. It was observed that the question was not what might be the usual principles for a valuation, but rather what the agreement was. The Court found that unexplained loss of a significant amount of cash was not in the ordinary course of business and accordingly as per the Agreement the expense was exceptional and excluded from calculations.
Again, the drafting was of the upmost importance.
Carroll & O'Dea Lawyers act regularly in relation to employment issues in business sales and purchases, including working with employees, and with accountants in drafting earn out provisions.
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.
