Cranstoun & Anor v Notta

Where a contractual termination process requires valuation and sale of business assets as a going concern, the valuation date is determined by the commercial operation of the agreement, not necessarily by the date on which notice was given. Contractual references to termination may therefore be construed as referring to initiation of the termination process where that is necessary to make the machinery workable. The valuation must reflect the price a willing buyer would pay for the business as a reasonably efficient operator, having regard to sustainable profit, the appropriate multiplier, the condition and prospects of the business, and material disruption affecting goodwill or future trade.

The claim arose from a contractual costs-sharing arrangement governing separate dental practices operated from shared premises. The defendant had admitted that he was deemed to be the seller and that his practice assets were to be valued and sold to the claimants. The court was required to determine the proper valuation date and the value of those assets.

The principal dispute concerned whether valuation should take place on 24 October 2018, when notice was deemed to have been given, or on the date of judgment. The court also had to assess competing expert valuations, including the sustainable income of the practice and the appropriate multiplier.

1. Construction and valuation date. The termination and sale provisions had to be construed in the light of their commercial purpose: securing a valuation and sale of the seller’s assets as a going concern. The reference in clause 24.1 to action “upon the termination” meant upon initiation of the termination process. The agreement was actually terminated on completion of the sale under clause 24.3, while clause 24.6 required the parties to continue operating the arrangement as if notice had not been given.
2. The deemed notice of termination therefore did not fix the valuation date. The correct date was 21 December 2020, the date of judgment.
3. Valuation methodology. The profits method was appropriate. A sole-principal approach was suitable for the expense-sharing dental practice. The valuation required assessment of sustainable income, application of an appropriate years-purchase multiplier, and adjustment for material factors affecting the value to a willing buyer.
4. The court preferred the more realistic expert approach. It adopted total maintainable income of £280,000, a fair maintainable operating profit of approximately £120,000 and a multiplier of 0.8. Relevant considerations included unreliable and incomplete financial information, the dated premises and equipment, the need to rebuild trade and reputation, the defendant’s abrupt absence, the small and uncertain active-patient base, the ongoing conflict and the COVID-19 restrictions. No further goodwill adjustment was made.
5. The defendant should have co-operated earlier to provide current financial information. The court could value the practice despite the evidential deficiencies.
6. The court declared that the valuation date was 21 December 2020 and that the value of the defendant’s practice assets was £96,000. Consequential matters were adjourned to a further hearing.