In reviewing the case of Munja Bakehouse Pty Ltd [2024] NSWSC 6, two divergent business valuation opinions were brought before the court, each reflecting different approaches to the valuation of Munja’s shares. The court had the challenging task of determining which valuation provided the most reliable reflection of the business’s worth. On one side was Mr. G, representing the defendants, and on the other, Mr. S, acting for the plaintiffs. While both experts employed EBITDA as a primary metric, the court ultimately favoured Mr. G’s valuation due to its stronger alignment with the specific circumstances of the business.
Now, even though the court may not have explicitly cited the International Valuation Standards (IVS), a deeper analysis reveals that adherence to these standards could have provided a clearer path to success for the valuation. Specifically, IVS 103 and IVS 104 offer important guidance on how valuers should approach the selection of methods and data inputs to ensure transparency, rigor, and reliability. Let’s explore how the application of these standards might have shifted the court’s preference if Mr. S had been aware of and compliant with them.
The Valuation Approaches
Mr. G’s Valuation took into account both EBITDA and EBIT methods, though his preference for the former reflected an insightful understanding of Munja’s financial landscape. He appropriately discounted the relevance of EBIT, recognizing that COVID-related accelerated depreciation had skewed those figures. By emphasizing EBITDA, Mr. G avoided these distortions, allowing for a more accurate assessment of the company’s performance. He applied multiples that were directly grounded in Munja’s own operational data, thus providing a clearer reflection of the business’s value.
Mr. S’ Valuation, by contrast, focused solely on the EBITDA method but attempted to bolster this approach by comparing Munja to businesses from a third-party database. While the intention to use market comparables is in line with good valuation practices, the execution raised concerns. The comparability of the businesses selected was not convincingly demonstrated, and the multiples used felt disconnected from Munja’s specific financial context. Here, IVS 103’s guidance on approach selection and IVS 104’s emphasis on relevant, observable data could have provided the structure needed to avoid these pitfalls.
Why the Court Preferred Mr. G’s Valuation
The court’s decision to prefer Mr. G’s valuation is instructive. His approach was seen as more aligned with the financial realities of Munja, as he relied on observable data—a principle central to both IVS 103 and IVS 104. Specifically, Mr. G’s method was rooted in the actual performance of the business, avoiding unnecessary reliance on external comparables that lacked demonstrable relevance. This decision-making process reflects the professional skepticism and judgment that IVS 104 encourages, particularly in how valuers should scrutinize their data inputs for relevance and reliability.
Had Mr. S adhered more closely to IVS 103 and IVS 104, the outcome might have been different. For instance, under IVS 103, valuers are urged to prioritize data that is observable and directly applicable to the asset being valued. In this case, Munja’s financial data should have formed the backbone of the valuation, with comparables used only where they demonstrably align with the business’s characteristics. Moreover, IVS 104 calls for transparent documentation of data sources and the rationale for input selection. If Mr. S had better documented why the chosen comparables were relevant, and if he had clearly demonstrated the reliability of his data, his valuation may have stood on firmer ground.
Lessons in Compliance with IVS 103 and IVS 104
Reflecting on the case, the court’s decision highlights several important considerations for business valuers:
- Observable Data vs. Assumptions: Mr. G’s reliance on observable data from Munja’s own performance was critical. This echoes IVS 103’s guidance that observable inputs should always be maximized. In contrast, Mr. S’ use of external comparables, without sufficient evidence of their relevance, leaned too heavily on assumptions rather than data grounded in Munja’s actual performance. IVS 104 would have required stronger justification for those comparables—something that was missing.
- Professional Judgment and Skepticism: Mr. G applied professional skepticism in his treatment of EBIT, recognizing that depreciation distorted the figures, a decision consistent with IVS 104. Had Mr. S approached his valuation with a similar level of scrutiny and tested his comparables more rigorously, he might have arrived at a more defensible conclusion.
- Documentation and Transparency: One of the clearest failings in Mr. S’ valuation was the lack of detailed documentation explaining his choice of inputs. IVS 104 mandates that all data sources and decisions be fully transparent and documented. This was a missed opportunity, and a more robust explanation of why certain comparables were used might have led the court to view his valuation more favorably.
What Could Have Been Done Differently?
Had Mr. S been more attuned to IVS compliance, we might be discussing a different outcome. By adhering to IVS 103, he would have been required to document his rationale for prioritizing external comparables over Munja’s own data. He would have been expected to consider multiple approaches—not just relying on EBITDA—and weigh their relative strengths. Under IVS 104, he would have been compelled to justify the selection of each comparable, documenting why it was relevant and how it aligned with Munja’s financial characteristics.
If he had followed these steps, his valuation might have better aligned with the court’s expectation for transparency and reliability, potentially leading to a different outcome.
Conclusion
The court’s decision to favour Mr. G’s valuation reflects a preference for methods that are transparent, data-driven, and aligned with the business’s unique characteristics—principles that are strongly supported by IVS 103 and IVS 104. If Mr. S had adhered more closely to these standards, particularly in the selection and documentation of his data inputs, his valuation could have been preferred.
This case underscores the importance of not just selecting the right valuation method but ensuring that every decision made in that process is grounded in observable, relevant data, thoroughly documented, and well justified. As valuation professionals, our role is to not only assess value but to provide clarity and assurance to all stakeholders, and compliance with IVS ensures we meet that obligation with precision and integrity.
Do you want to know more? Kevin Lovewell is an Accountant and Registered Business Valuer – He works as a business intermediary acting as various seller or buyer agents and as the principal agent in complex M&A projects; he is an active business valuer in the Small to Medium (SME) Market regularly undertaking work in appraising SME businesses for their market value.
Kevin Lovewell
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Member & Registered Business Valuer
Australian Institute of Business Brokers
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