Before jumping headfirst into a business valuation, you need to iron out the fundamentals. One critical factor to identify up front is the effective valuation date, especially in today’s volatile market conditions. What’s appropriate may vary depending on the valuation’s purpose.
Valuation date variations
Consider the following situations:
Estate tax valuations. For estate tax purposes, assets normally are valued on the date of death. But under certain circumstances, an executor may elect to use the “alternate valuation date,” which is six months after the date of death. The later date may be advantageous if the decedent’s estate includes closely held business interests, real estate or other property that’s declined substantially in value since the date of death.
There’s a catch, though. The executor can’t selectively apply the election to assets whose values have declined sharply. Rather, if the alternate valuation date is selected, it must be used for all assets in the estate (except for those sold between the date of death and the alternate valuation date, which are valued on the sale date).
Divorce cases. State law usually prescribes the valuation date in divorce proceedings. Typically, it’s the date the divorce action commenced. But it could also be the trial date, the date a divorce decree is issued, or some other date established by law or by agreement of the parties. In some states, the court may select a valuation date that would be fair to both parties.
Shareholder disputes. In cases involving dissenting or oppressed shareholders, applicable law often provides that the presumptive valuation date is immediately before the wrongful act that triggered the litigation. However, it’s not unusual for parties to argue for an alternate valuation date if they feel that using the presumptive date would be unfair. For instance, circumstances might call for an alternate date when sufficient market information on the presumptive valuation date is unavailable, or when a contingency or potential liability that wasn’t yet resolved on the presumptive date is discovered.
In addition, an aberration that temporarily increased or decreased the stock’s value around the time of the corporation’s wrongful act might call for an alternate date. So too, might evidence that the corporation’s wrongful act was timed to take advantage of a historically high or low stock price.
Timing counts
Generally, business valuation professionals consider only information that was “known or knowable” at the valuation date. Why not include subsequent events in valuators’ analyses? Because fair market value should be based only on information hypothetical buyers and sellers would have known at the valuation date. But because subsequent events may be foreseeable and may provide valuation evidence, there are exceptions.
The effective valuation date is critical, but no steadfast rule applies to all situations. Our experienced valuation pros can help evaluate your circumstances and relevant case law to determine what’s appropriate. Contact us for more information.
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