A buyer and a seller in an M&A transaction may value the business or target company based on an agreed basis such as by reference to a multiple of profits for an agreed period of time.

The buyer may want to consider including a clause in the sale and purchase agreement to state that the parties acknowledge that the price for the business or shares has been calculated on this basis and any damages for breach of warranty will be calculated by reference to the basis.

Although the clause may not be regarded as conclusive in a court, it is likely to be helpful to the buyer in determining the damages. However, it should be noted that such clause should be a reasonable estimate of the buyer’s loss so that it will not be deemed as a penalty and rendered unenforceable.

When setting out the basis in the sale and purchase agreement, it should be as clear as possible.

For example, if the parties agree that the multiple will be based on profits, be clear whether it is pre-tax or post-tax profit.

Where the parties intend for the valuation to be reduced by the amount of “shareholders loan”, be sure to check whether “shareholders loan” is solely loan from shareholders of the target company or other loans from related companies (which are not shareholders of the target company).

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This post was first posted on Linkedin on 22 June 2022.