Plenty of commercial disputes come down to a single question once liability is argued out: how much was lost? When a business experiences a loss, whether it’s from a stream of profits or the value of a shareholding, the answer depends on a business valuation. This business valuation will face tough scrutiny from the other side.

This article explains where business valuation evidence appears in commercial disputes. It highlights key points and what lawyers and their clients can expect from their expert.

When does a commercial dispute need a business valuation?

Whenever the loss being claimed is tied to what a business earns or what it's worth. Common examples include:

• Breach of contract, where a terminated supply, distribution or franchise agreement has cost a business profits or reduced its value

• Warranty claims after a sale, where a buyer says the business was worth less than the price paid because of a breached warranty or a misstated set of accounts

• Earn-out and completion accounts disputes, where the price depends on post-sale earnings or a working capital adjustment

• Restraint of trade breaches, where a former owner or key employee has taken clients and the goodwill that came with them

• Misleading or deceptive conduct claims, where loss is measured by what a business or investment was really worth

• Joint venture and partnership exits, where one party's interest has to be priced

In each case, the business valuation acts as evidence. The court or tribunal will weigh it against the evidence presented by the other side.

Is the claim for lost profits or loss of value?

This is often the first issue to settle, because the two are measured differently and can overlap.

A lost profits claim looks at the earnings the business would have made over a period if the wrong hadn't happened. A loss of value claim looks at the drop in what the business is worth, usually at a point in time. The value of a business already reflects its expected future profits, so claiming both for the same period can count the same loss twice. A sound expert report makes clear which measure it uses and why, and shows that the two haven't been added together.

What is the "but for" valuation?

Most loss calculations compare two positions. The first is what the business is worth now or on a specific date. The second is what it would have been worth if not for the conduct being complained about. That second figure, the counterfactual, is where most of the argument sits.

The expert has to build a version of the business that never existed. This means forming views on revenue, margins, and risk in a world without the breach. Each view must be supported by evidence. This includes historical performance, budgets prepared before the dispute, industry data, and the business's own track record. A counterfactual built on optimistic forecasts prepared after the dispute started is easy for the other side to pull apart.

Why does the business valuation date matter?

Because the answer can change a lot depending on the date chosen, and the choice is often contested. The usual candidates are the date of the breach, the date of trial, or a date set by the contract.

Linked to this is the question of hindsight. Should the business valuation reflect only what was known at the date of the breach, or can it take account of what happened afterwards? The approach depends on the type of claim and the legal principles that apply, so it's a matter for the lawyers to instruct on. The expert's job is to apply the instructed date and approach consistently, and to show the effect of the alternatives where that helps the court.

What does the expert decide, and what do the lawyers decide?

The boundary matters, and reports that cross it lose weight.

Causation, mitigation, the correct measure of damages and the legal effect of contract terms are legal questions. A business valuation expert works with the assumptions given by the lawyers. They clearly state each assumption and then value the business based on those points. Where the assumptions are disputed, it often helps for the expert to value under each alternative, so the court can see the financial effect of whichever view it takes.

The expert focuses on financial analysis. This includes normalising earnings, selecting a valuation method, assessing risk, testing forecasts, and explaining how each factor influences the final figure.

What duties does a business valuation expert owe the court?

An expert witness's paramount duty is to the court, not to the party paying for the report. The Federal Court's Expert Evidence Practice Note says an expert must not become an advocate for the party that retained them, and must state the assumptions and material facts each opinion is based on.

In practice, this is what makes a business valuation persuasive. A report that outlines its assumptions, explains its reasoning, and recognises differing views is much harder to discredit. This is compared to one that simply focuses on the best number and defends it at any cost.

What happens when the experts disagree?

Courts commonly direct experts to confer without the lawyers present. They must prepare a joint report that clearly outlines where they agree and where they disagree. Experts may also be asked to give their evidence concurrently, answering questions together at the hearing.

This tends to narrow the dispute quickly. When the experts meet, the gap often narrows to a few key assumptions. These include maintainable earnings, the discount rate, and the counterfactual forecast. An expert who has clearly documented their reasoning can explain their position on each point without needing to redo the analysis.

How can a valuation review help in a commercial dispute?

The other side may have already provided a business valuation. Your client needs to know whether it holds up before deciding how to respond. A review of the report identifies methodological errors, unsupported assumptions, inappropriate discounts and calculation problems, and helps frame the questions to put to the other expert.

A reviewing expert can also act behind the scenes as a shadow expert, supporting the legal team through the matter without filing a competing report. That can be a cost-effective way to test the other side's numbers early, before deciding whether a full independent business valuation is needed.

What should lawyers give a business valuation expert?

The quality of the report depends heavily on the brief. A clear brief usually includes:

• the questions the expert is asked to answer

• the valuation date or dates, and the measure of loss to be applied

• the legal assumptions to adopt, including on causation and the counterfactual

• the pleadings and relevant contracts

• financial statements, management accounts, budgets and forecasts, ideally including those prepared before the dispute

• any business valuation or expert report already served by the other side

Briefing the expert early, before positions harden, also gives time to spot gaps in the financial information and request what's missing.

Where this leaves you

In a commercial dispute, the business valuation often decides how much the outcome is worth. Evidence that is independent, clearly reasoned and transparent about its assumptions gives the court something it can rely on, and gives your client a stronger position in any settlement discussion before trial.

Talk it through

If you're acting in a commercial dispute where the loss depends on what a business is worth, get in touch to discuss the matter.

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