Historical Business Valuations and the Goldilocks Principle: Not Too Much or Too Little but Just the Right Amount of Hindsight

Published: 13/03/2024 07:00

This article compares the attitude taken to the use of hindsight in the commercial courts with that in the family courts.


The recent case of GA v EL [2023] EWFC 187 and [2023] EWFC 206 provides a useful review of case-law in relation to historical valuations of companies by accountancy expert witnesses and the use of hindsight.

It is instructive to consider and compare the two judgments that have been published in this case: (1) the judgment of Peel J in relation to the wife’s Daniels v Walker application, heard at the pre-trial review in October 2023,1 in which the wife applied for permission to adduce her own expert accountancy evidence because she disagreed with the conclusions of the single joint expert (SJE); and (2) the judgment of Stephen Trowell KC (sitting as a Deputy High Court Judge)2 following the final hearing that took place 6 weeks later in November 2023.

A comparison between the two judgments sheds useful light on the current law regarding historical business valuations and the application of hindsight.

The background

The parties had married in 2007 and co-founded a software company in 2008. Following their separation in November 2019, negotiations over the business’s sale began and it was eventually sold in early 2022, realising for the parties approximately £35m gross comprising a mixture of: (1) cash; (2) loan notes; and (3) shares in the purchasing company.

The key issue in contention was whether the increase in the business’s value post-separation resulted from the husband’s efforts.

DCHJ Trowell reminded himself that the court has to undertake a three-stage inquiry:

(1) to determine if the business value rose post-separation;

(2) to assess the husband’s contribution to this increase; and

(3) to decide on a fair asset division.

It is the third of these issues that is critical in understanding the extent to which expert accountancy witnesses can be asked by the court to shed light on historical business valuations for the reasons explored below.

Commercial court’s approach to hindsight in business valuation

In GA v EL, the court-appointed SJE valued the company at £14.1m as of November 2019. In so doing he adopted the traditional approach by which no account was taken of hindsight.

This accords with a long-held tradition in the commercial courts that the valuation of a company at a particular date should be undertaken without the benefit of hindsight. The approach of taking no account of hindsight was reaffirmed by the Court of Appeal in the context of a claim for an alleged breach of contract, in the case of Joiner & Anor v George & Ors [2002] EWCA Civ 160. In that case the allegation that the judge at first instance had erred by failing to take any account of hindsight was rejected.

There are some instances in which the commercial courts have allowed a limited degree of hindsight to be taken into account but only insofar as it can be used to shed light on what forecasts could have been reasonably made at the valuation date.3 However, the clear basic principle is that only information likely to have been known at the valuation date should be taken into consideration by the valuer.

From an accountancy perspective, there is a very good reason to ignore hindsight. Consider the historical valuation of an asset at, say, 1 January 2014 and suppose that the asset was in fact realised for £1m on 1 January 2024. If one knew in 2014, with perfect hindsight, that there was absolute certainty that the asset would realise £10m in 10 years’ time, then the value of the asset in 2014 is simply £1m discounted only to reflect the time value of money (effectively inflation) for the 10 years between 2014 and 2024.

Different approach in the Family Court

This raises the question as to how a clear line of reported authorities that very greatly restrict the use of hindsight in the commercial courts can be reconciled with a growing line of authorities in the Family Court, most recently endorsed in GA v EL, ‘that it is not merely legitimate but is realistic and right to use hindsight when making in family proceedings a historic valuation.’4

Perhaps the answer to this apparent inconsistency of approach between the commercial and family courts lies in the concept of ‘fairness’. Forensic accountants are sometimes asked to opine on Fair Value (although now strictly speaking the term is ‘Equitable Value’5) but the concept of overall fairness or overarching fairness is a measure that is outside the area of expertise of any accountancy witness and is not a matter on which such witnesses are qualified to opine. By contrast, fairness or equity lie firmly within the preserve of the court.

Essentially, the accountant business valuer is trying to answer the question as to what value a hypothetical purchaser would pay to acquire an asset at the valuation date knowing only what was known by such a person at the time, i.e. without the benefit of hindsight.

Indeed, for the reasons set out above, if valuers were to use perfect hindsight, they would simply discount the present-day valuation to take account of inflation or the time value of money and the historical valuation would be uncontentious and formulaic.

By contrast, the Family Court poses a different question, namely what value should be ascribed to an asset at the historical valuation date so as to give an equitable outcome to the parties. Essentially, the court applies the benefit of hindsight but only partially. Hindsight is to be applied but only to the extent necessary to achieve fairness. Hence the reference to Goldilocks in the title of this article. The court must not apply too much nor too little but just the right amount. It can use a crystal ball but a cloudy one.

To that end the family courts have developed a series of what the court referred to in GA v EL as a ‘rough and ready’ approach to derive historical valuations. These include a simple linear approach in which the value of the company is time apportioned on a pro-rata basis across the life of the business6 and the application of a notional ‘springboard’ to uplift the accountant’s valuation at the start of the relationship.7 Neither of these two approaches are recognised by accountants. They are mechanisms by which the court derives a figure that achieves fairness by adjusting the accountant’s valuation or simply directly estimating an appropriate valuation.

The fact that hindsight is not a matter for accountancy experts is clearly demonstrated if one looks closely at the two judgments in GA v EL.

Hindsight in GA v EL

In the judgement following the pre-trial review in GA v EL [2023] EWFC 187, Peel J referred to the SJE having opined, in replies to FPR Part 25 questions, that the value of the parties’ combined interests in November 2019 was about £18.9m on the ‘hindsight approach’ compared with his valuation of £14.1m on the so-called ‘present day approach’.

However, in the judgment following the final hearing8 Stephen Trowell KC (sitting as a Deputy High Court Judge) made it clear that, in reality, the difference between these two figures was not ‘one of hindsight’.9

The lower valuation reflected calculations and estimates using information available in November 2019, including management accounts for October 2019 but without the benefit of any projections that might have been available at the time.

In his oral evidence the SJE explained that, although he had asked the husband what future growth was anticipated in November 2019, very little information was provided to him in reply. Indeed, he referred to this lack of evidence as being a significant limitation on the scope of his work. The SJE therefore had no alternative but to make his own assessment as to what forecasts might have been prepared in November 2019 by a hypothetical purchaser. He did so by preparing three different projections with incrementally increased levels of optimism as regards sales and profits.

By contrast, the so-called by Peel J (but mis-named) ‘hindsight approach’ valuation that was given in answer to the questions raised by the wife, used information which was advanced in a marketing presentation sent out in July 2021. This would not have been available at the valuation date. It included actual accounts for the period ending in February 2020 and 2021 and projections of growth for 2022 through to 2024.

In the wife’s Part 25 question, she asked the SJE to recalculate the valuation using the actual and forecast growth in the sales brochure. The question did not invite him to consider whether the growth forecast was reasonable. Indeed, in subsequent oral evidence, the SJE stated that he expressly preferred the figure in his report as the value of the company in November 2019, than the figure in his answers to questions. He did so because he considered that, as things were in November 2019, the original figures in his report as to his estimates as to future growth in 2024 were reasonable.

Interestingly, there is no reference in the judgment of the final hearing to the SJE having ever been asked to what extent he considered that the July 2021 marketing presentation shed light on what might reasonably have been prepared for a hypothetical purchaser in November 2019 had the company been marketed at that time. Such a question would have been entirely in line with the commercial case-law authorities such as Buckingham v Francis Douglas Thomson [1986] 2 All ER 738, that make it clear that ‘regard may be had to later events for the purpose of deciding what forecast for the future could reasonably have been made’ at the valuation date.

Nevertheless, it appears that, although not explicitly stated, this is exactly what the SJE had done. He had used the July 2021 marketing presentation as justification for concluding that, in November 2019, a hypothetical purchaser might have been more optimistic about the future prospects of the company than the SJE had originally concluded in his report.

Accordingly, the SJE used the July 2021 marketing material to justify an increase in the multiple. As the judge described it: ‘the multiple derives from the projected revenue for 2024, and that is a projection of future growth made with the sales information. The difference is not then one of hindsight: it is a projection but a more optimistic one’.


If one were to read Peel J’s judgment in relation to the Daniels v Walker application, one might be forgiven for thinking that accountancy expert witnesses can and indeed should have regard to hindsight when undertaking historical business valuations.

However, DHCJ Trowell KC’s judgment of the final hearing makes it quite clear that the SJE did not in fact apply hindsight other than to the very limited extent of allowing the existence of subsequent evidence to inform his opinion as to what a hypothetical purchaser might reasonably have forecast at the valuation date. This approach was endorsed by the judge and is entirely consistent with long-established principles of business valuation in the commercial courts.

The SJE’s historical valuation is, however, only a starting point. It can then be adjusted to take account of overall fairness. That is a concept that is firmly outside the realm of the expertise of accountants.

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