When is a transaction not ‘market value’?

In a recent Supreme Court of Victoria judgment, the Court explored whether a transaction should be regarded as representing ‘market value’ for which a subsequent valuation opinion could be based. 

The definition of ‘market value’ as defined by the International Valuation Standards Council is as follows:

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. (IVS 104 p18 30.1)

Spencer v Commonwealth (1907) 5 CLR 415 has been a long-standing Australian judicial precedent in which the hypothetical vendor and purchaser are not only willing and able, but are fully informed and both are willing but not anxious, which is in line with the International Valuation Standards Council definition.  

In the matter of Porter & Anor v Mulcahy & Co Accounting Services Pty Ltd & Ors (No 5) the accounting expert retained by the Defendant relied upon a completed transaction involving one of the parties to the proceedings, which the expert retained by the Plaintiff criticised on the following basis:

1. the multiple from the transaction did not reflect a market transaction as it was subject to litigation and the parties to the transaction were later found to have breached their duties;
2. the actual sale price compared to the independent valuation was described in a previous judgment in this matter as being ‘grossly understated’; and
3. no additional transactional or market evidence was provided in support of the transacted multiple.

The prior comparable transaction relied upon by the Defendant’s expert argued to be ‘market value’ involved an EBITDA multiple of 2.4x, whereas an alternate methodology adopted by the Plaintiff’s expert argued an EBITDA multiple of 5.0x. As such, the concept of whether the transaction is considered ‘market value’ was material to the outcome of the proceeding. 

In the judgment, Delany J stated the following:

I agree with Mr M that the actual sale in 2018 is not an appropriate market data point. It is not a transaction that reflects market value. There are three reasons that is the case. 

First, because Mr D was an ‘anxious’ vendor. 

Second, because given the exclusion of the plaintiffs, the sale was not a ‘market’ sale. 

Third, because the price did not accord with the market value as advised to the vendor at the time and as independently assessed by MW and others.

….

For the reasons discussed, I consider Ms W’s reliance on the 2018 actual sale as a transaction reflecting market value is misplaced. [171 – 178]

In summary, the Court found the transaction relied upon by the accounting expert for the Defendant did not meet several aspects of the IVSC definition of ‘market value’, including the existence of an ‘anxious’ vendor, and thus was not a comparable ‘market value’ transaction upon which a valuation opinion could be based. 

This judgment reaffirms the onus on business valuation professionals to understand whether a transaction occurred at ‘market value’ if they are going place reliance for their opinion on a single transaction.

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