A business valuation forms the foundation for many key aspects of a business. Some of which include strategic planning, buy/sell agreements, tax and estate planning, financial reporting, stock option grants, M&A transactions, and succession/exit plans.
A logical question to ask is: how long is a valuation good for? In short, probably a year, but the long answer is it really depends. Below are several aspects that will impact how long a valuation may be valid for.
1. Valuation Date
When determining the value of a business, it is always done as of a specific date. A business valuation analyst considers only known or knowable information as of that date. As such, the value of your business can fluctuate just like the stock market on any given day. Hence the value of your business can change quite a bit over time.
Some valuations such as Employee stock ownership plans are legally obsolete after a year. Other valuations such as those for estate tax, litigation appraisals, merger and acquisition reviews, and fairness opinions are normally one-time engagements for the specified date.
2. The Purpose of the Valuation
The purpose of the valuation often has major significance as well. For instance, a valuation expert can arrive at a vastly different conclusion when a appraisal is performed for a partnership buyout versus selling to a strategic buyer. Understanding the context and purpose of the valuation is essential. Hence, a change in the purpose will likely impact the value.
Some valuations are open-ended. This is because their underlying purpose is long-term. The most common example is when a business owner sells or transfers minority business interests each year as part of their estate and business succession plan.
3. Valuation Assumptions and Methodology
A business valuation is generally valid as long as the methodology is sound and the assumptions are still true. Updating your valuation yearly will reflect subsequent company performance and the current economic and industry conditions. Some assumptions change quickly while others slower. The analyst will consider all these factors when determining the value of a company.
According to the American Society of Appraisers, “Each day there could be slight modifications of value due to changes in the capital structure of the company; however, in general practice, if there are been no significant changes in the operations of the business or its capital structure, annual updates may satisfy most uses of the appraisal report.”https://www.appraisers.org/Disciplines/Business-Valuation/about-bv/bv-faq
What might change the value within a year?
- Change in revenue or earnings
- Change of control
- New management team
- Loss of a key person
- Legislation changes that impact your industry
- Change in the purpose of the valuation
- Economic or industry changes
If no major changes occur like those discussed above, an update to a business appraisal is a relatively modest project. The financial analyst will use the most recent financial information and the knowable economic and industry information. However, if there have been major changes in the industry, economy, financials, etc.. the valuation is more complex.
Peak Business Valuation is a leading business appraiser in Utah. We specialize in helping small-mid size businesses understand the value of their company whether they are looking to grow or sell. Schedule your free consultation below to get started.