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There are numerous ways to value a business and so there is plenty of scope for valuations to differ but sometimes the valuation is simply wrong. Are there rights of redress when someone buys a business only to discover, post purchase, that it has been significantly overvalued? Is there a right to insist on the deal being reversed? Can you claim compensation where you have relied on a professional valuation or on representations made by the seller?
The answers will depend on the method of valuation that was adopted, and the terms of the sale agreed. Legal advice at an early stage will be essential to help determine whether any potential right of redress may exist and if so against whom. It will also give the best chance of settling a grievance quickly and where possible without the need for formal court action.
The Seller and the Valuation
If the valuation of the business was based wholly or substantially on information or audited accounts provided and verified by the seller, then we would advise to check the sale agreement to see if any warranties have been given to in respect of the accuracy of the financial information provided. If they have, and it turns out that the information was not accurate, then it may be possible to sue the seller for compensation on the grounds of breach of warranty. However, check the sale contract carefully because there may be restrictions on the ability to take action in respect of a breach unless any losses have been incurred are above a certain threshold.
Where suing for breach of warranty is not an option but it can be demonstrated that the price paid was based on written or oral representations made by the seller it may be possible to sue for fraudulent, negligent, or innocent misrepresentation.
Fraudulent misrepresentation is likely to have occurred where the seller has made a statement that they knew at the time to be false, or where they were reckless as to the truth
of what they were telling a prospective buyer. This is in contrast to negligent misrepresentation, which may have occurred where a false statement has been made carelessly, and innocent misrepresentation where a false statement has been made in ignorance of its inaccuracy.
It will be necessary to check the detail of the contract carefully as it is not uncommon for sellers to try to exclude liability for misrepresentation, which is unsurprising given that in some cases a successful claim brought on this basis may lead to the sale being reversed.
Where the business auditors can be shown to have been negligent in the way that they prepared the sale accounts, it may be possible for the seller or even possibly the business itself to sue the auditors directly for appropriate compensation.
Professional advisors and valuations
Where reliance is placed on an assessment of the ‘worth’ of a business undertaken by your own professional advisors and this turns out to be wide of the mark (even allowing for a reasonable margin of error), it may be possible to bring a negligence claim against them instead, or in addition to, any other claim that you may have.
In this scenario, check the terms of your retainer letter to determine the exact parameters of what it is the advisors were instructed to do and ensure that there are no restrictions or limitations which may operate to prevent a claim being pursued.
How our dispute resolution lawyers can help
If you have purchased a business which you now suspect was overvalued, then we can review the terms of your deal and the circumstances leading up to the sale in order to determine what action you may be able to take in order to obtain redress.
Where there are grounds for making a claim, whether against the seller, the auditors of the business or even your own advisors, then we will contact them and do what we can to resolve matters amicably and on terms that you find acceptable.
