The valuation of a business is prepared as of a certain date in time. This could be any date, often determined by the purpose of the valuation. A valuation prepared for estate tax purposes is as of the date of death. A valuation for divorce purposes is often the date of service. The valuation date could be an agreed upon date such as year-end, quarter-end or month-end. Analysts prepare the valuations after the valuation date – sometimes just a month or two later, sometimes a year or two depending on the circumstances. So how does an analyst deal with events that happened after the date of valuation that they become aware of during the course of performing the valuation?
Known or knowable
In determining any impact, the analyst must determine if events or occurrences were known or knowable as of the date of valuation. For instance, if a major new product line was started nine months after the date of valuation, the analyst should consider whether or not the company was in the process of adding that product line at the date of valuation. If the addition of a new product line was known or knowable, then using a projection which includes revenues from that product line would be appropriate in determining the expected future cash flow of the Company. However, if the Company truly had no plans to expand as of the date of valuation and implemented the new line completely after the date of valuation, the use of the projections with that new product line would not be appropriate.
Let’s consider the valuation of a small business for estate tax purposes. The primary owner dies on September 27, 2016, the date of valuation. The valuation analyst is hired in July 2017 to perform the value for estate tax purposes. In the process of interviewing management, the analyst learns that in June of 2017 a major long-term customer decided not renew its contract due to the passing of the owner. Management wants to provide projections that reflect the decreased revenues and subsequent decreased income. Was the decrease in revenues known or knowable on September 27, 2016? Certainly there is a risk that a customer will leave but if this was a long-term client who had not given any indication of leaving, it would be hard for the analyst to argue the drop in revenues was known or knowable. Therefore, the use of projections with lower revenues to determine cash flow may not be appropriate. Of course, the risk associated with being dependent on a major customer should be considered by the analyst.
Value is as of a specific date. Events after the valuation date should not impact value unless they were known or knowable as of the valuation date.
Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV