One of the first things we must understand is the effect of the valuation date on a valuation. A valuation is performed as of a date in time. That date is often determined by the circumstances which have led to the need for a valuation. For instance, a valuation for estate tax filing is the date of death or six months later if the alternative date is being used. A valuation for gift tax filing is most often the date of gift. A valuation in context of marital dissolution is often as of the date of service but can be a more recent date.
The valuation date drives many factors in a valuation. A factor to consider with regards to the COVID-19 pandemic is that of what was “known or knowable” on the valuation date. In the course of a valuation, analysts must only consider what is known or knowable at the valuation date. If circumstances were not known or knowable at the valuation date, the impact of the circumstances should not be considered in the valuation.
Valuations being performed during the pandemic, but with valuation dates prior to December 2019, should not consider the economic impact the pandemic is currently having on the company. The virus may have been known about in December, but its economic impact was not known or reasonably knowable at that time.
The exact date the impact of the pandemic was known or knowable can be debated among valuation and other experts. Some things to be considered include:
January 30, 2020: The World Health Organization (WHO) declares a global health emergency. Dow Jones up 1.1 percent since December 31, 2019.
January 31, 2020: Travel from China is restricted. U.S. declares public health emergency. Dow Jones down 1 percent since December 31, 2019.
February 11, 2020: WHO names the ongoing disease COVID-19. Dow Jones up 2.6 percent since December 31, 2019.
February 12, 2020: Dow Jones up 3.5 percent since December 31, 2019, reaches all-time high of 29,551.
February 24, 2020: U.S. stock market plummets among coronavirus fears. Dow Jones drops 1,031 points, down 2 percent since December 31, 2019.
February 29, 2020: First death related to COVID-19 in United States.
March 11, 2020: WHO declares COVID-19 a pandemic. Dow Jones falls into a bear market, down 17.5 percent since December 31, 2019 and more than 20 percent since its peak on February 12.
March 13, 2020: President Trump declares a national state of emergency. States begin announcing school closures. Dow Jones drops 367 points.
March 15, 2020: Centers for Disease Control and Prevention (CDC) recommends no gatherings of 50 or more people for the next 8 weeks.
March 16, 2020: Dow Jones drops 3,000 points and NASDAQ is down approximately 26 percent since December 31, 2019.
March 16, 2020: President Trump advises to avoid gatherings of 10 or more people, to avoid going to bars and restaurants and to halt discretionary travel.
March 27, 2020: $2 trillion economic stimulus bill signed by President Trump.
This is just a sampling of some of the important dates that may be considered by the valuation analyst. Of course, state declarations and stay at home orders should also be considered. The analyst should also consider the industry in which the company operates and of course any direct impact seen by the company.
What is known or knowable as of the valuation date is only part of how the pandemic may affect a valuation. Other items for consideration include:
- Expected ongoing cash flow – is the business expecting cash flow to be permanently decreased or is a rebound likely, and if so, when? Or, if the company is in an industry which is experiencing a surge in cash flows during the pandemic (liquor stores, groceries, delivery services, certain cleaning services, etc.), the analyst must be careful not to overstate anticipated ongoing cash flows.
- Impact of any stimulus – has the company been able to receive any stimulus aid such as a Paycheck Protection Program (PPP) loan? Will part or all of the loan be forgiven?
- Employee retention – if employees have been laid off, will the employer be able to easily replace their workforce?
- Additional risks – have any additional risks to achieving the projected cash flows been identified?
- Management – how sophisticated is management and what plans have been implemented or are in place to mitigate risks to the company?
With the uncertainty of the current economic conditions, answering these questions as of the valuation date may be very difficult. Analysts may spend even more time modeling potential outcomes and scenarios. Business owners and their advisers may want to discuss the availability of alternative valuation dates.
Join us on April 22 for our Webinar – Business Valuations During a Pandemic for further discussion of COVID-19 and its impact on valuation.
Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV, Director, Litigation+Valuation Services