Paid too much for an overvalued business?

When the New York Times announced in February 2022 that they had bought the popular free to play word game Wordle for a seven-figure sum, there were a few raised eyebrows. How could a game that was only launched a few months earlier, which has never generated any income, already be worth millions of pounds?

The answer lies in the potential of the game to help the New York Times boost their online subscription numbers, and in doing so to substantially increase their revenue. Nobody yet knows whether this strategy will work, but it is a gamble that the publisher is willing to take.

There are lots of ways to value a business, so there is plenty of scope for valuations to differ.   But what happens when you have agreed to buy an established business which you subsequently discover has been significantly overvalued? Do you have any right to insist on the deal being reversed and can you claim compensation where you have relied on a professional valuation or on representations made by the seller?

Your ability to take action 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 you determine whether any potential rights of redress may exist and if so against whom. It will also give you the best chance of settling your grievance quickly and where possible without the need for formal court action.

Valuations based on information provided by the seller

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 you to check your sale agreement to see if any warranties have been given to you in respect of the accuracy of the financial information provided. If they have, and it turns out that the information was not accurate, then you may be able 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 your ability to take action in respect of a breach unless any losses you have incurred are above a certain threshold.

Where suing for breach of warranty is not an option, but you can show that the price paid was based on written or oral representations made by the seller and on which you relied, you may instead be able 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 you. 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. 

Again, you will need to check the detail of your 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.

And where the business auditors can be shown to have been negligent in the way that they prepared the sale accounts, then it may be possible for the seller or even possibly the business itself to sue the auditors directly for appropriate compensation.

Valuations based on information provided by your professional advisors 

Where you have relied 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), then it may be possible for you to bring a negligence claim against them instead or in addition to any other claim that you may have.

In this scenario, you should check the terms of your retainer letter to determine the exact parameters of what it is your 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 you have 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.

And where settlement cannot be achieved, we can support you in taking matters further and in ultimately issuing a legal claim at court where this becomes necessary.

To find out more, please contact a member of our Dispute Resolution team at our York office on 01904 624185.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.