A US court held that damages claimed in connection with the breach of a purchase agreement for the sale of business can be appropriately measured based on multiple earnings before interest, taxes, depreciation and amortisation (EBITDA) where it is claimed that the breach impaired the earning powers of the business being acquired.
The court, after finding that the seller had breached the sale agreement by failing to disclose to the buyer that its relationship with two key customers had soured causing the buyer to overpay, applied the well-settled principle under New York law that an injured party is entitled to be put in the position it would have been in had the contract been fulfilled without the breach. The buyer is entitled to the “benefit of the bargain” which is measured as the difference between the value of the company purchased as warranted by the seller and the true value at the time of the transaction. The plaintiff need not prove damages to theoretical perfection but need only show a stable foundation for a reasonable estimate of the damages incurred as a result of the breach which requires “some improvisation”. The court found that the buyer had adopted a discounted approach to the value of the business at the time of the sale and that an implied EBITDA multiple of 7.55x, derived from dividing the purchase price by the trailing 12-month-adjusted EBITDA at closing, was the appropriate measure of damages associated with the permanent loss in sales from the two customers. Approximately $4.48 million was awarded to the buyer.
The same principle will be applied in a similar breach of contract suit in South Africa. South African law also applies a flexible approach to calculating damages.