The Importance of a Valuation Date
Every business valuation has a specific valuation date. What is the importance of this date? This date of valuation refers to a specific point in time in which an asset is assigned a dollar value. The following discusses the important role an appraisal date plays in business valuation.
Value Fluctuations
The value of your business can change quite a bit over time. Depending on the circumstances of your business, internal and external factors influence the value. As such, the value of your business fluctuates kind of like the stock market on any given day.
For instance, we recently worked with a company whose profits were decreasing despite a growing industry. This decreased the value of the company. Similarly, if a key customer or supplier terminates the relationship, sales or margins decline, resulting in lower earnings and a drop in business value.
Market Changes
When using the market approach, it is important to compare similar companies at the given time of the valuation. Market comps depend on the assessment of similar revenues, profits, asset bases, and/or equity. As the market outlook changes, it impacts the financial performance and value of various businesses.
Specific Events
The date of the appraisal is often very important in consideration of specific events. The following are a few examples to consider:
- Divorce: In divorce cases, the court determines how to distribute assets. Assets may include a home, real estate, or business. The law varies from state to state on when the valuation date is. Most often, either the trial date, date of final separation, or date of divorce is the date of the appraisal.
- Estate Tax: For estate tax purposes, assets are typically valued at the date of death. However, certain circumstances allow an executor to elect an alternate date of valuation, which most commonly is six months after the death date. This is advantageous in the event the estate includes securities, real estate, businesses, or other assets which substantially decline in value since the death. If the alternate date is elected, all the assets in the estate must be valued as of that date. (Except for assets sold between the death date and alternate valuation date, these are valued on the date of sale.)
Historical Valuation Dates
In the valuation of a closely-held business, an analyst only considers facts available at the specified date. Sometimes, business appraisers perform a valuation for a prior date. But the appraisal won’t include subsequent events after that date. Business analysts consider only information that is “known or knowable” at the date of valuation.
As the valuation analyst is determining the fair market value, they only include information hypothetical buyers or sellers would have known at the date of valuation. Then again there are exceptions. Some subsequent events may be foreseeable and provide valuation evidence. There is no steadfast rule that applies to all cases. A business appraiser evaluates the circumstances and uses their professional judgment to determine how to treat subsequent events.
Summary
A date of valuation is critical, so it is important to discuss this date with your business analyst before they begin the appraisal. This ensures they determine the value as of the appropriate date.
Peak Business Valuation loves helping small business owners with business valuations. We welcome any questions you have. Please reach out by scheduling a free consultation.
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