When to consider subsequent events in a business valuation

Business valuators sometimes consider major events that happen after the valuation date. For example, what if a business is subsequently sold, files for bankruptcy, discovers new technological advances, or experiences a major fraud loss, data breach or natural catastrophe? Such events could potentially affect a business’s fair market value, but whether a valuator will consider a particular event depends on the facts and circumstances of the valuation assignment.

“Known or knowable” principle

In general, events that are known or knowable on the valuation date will be factored into a valuation. Or valuators might consider the risk that a particular event will happen. But there are several exceptions.

For example, in Estate of Jung v. Commissioner (101 T.C. 412, 1993), the U.S. Tax Court concluded, “Actual sales made in reasonable amounts at arm’s length in the normal course of business within a reasonable time before or after the valuation date are the best criteria of market value.” This landmark case differentiated subsequent events that affect fair market value from those that provide indications of value.

If a subsequent event affects fair market value, the Tax Court will consider it only if it was known or reasonably foreseeable on the valuation date. But if a subsequent event provides an indication of value, it might be considered — even if it wasn’t foreseeable — as long as it occurs within a reasonable time frame and at arm’s length.

Fairness considerations

In other courts, the concept of fairness may dictate whether a subsequent event will be factored into a business’s value. For example, suppose that the parties in a divorce case stipulate to using the filing date (rather than the court date) to value all marital assets. If the owner-spouse receives an offer to sell the business in the interim — or if its headquarters is subsequently destroyed in a hurricane — the court may consider these events when equitably dividing the marital estate or calculating support payments. Similar fairness guidelines may apply in shareholder disputes.

Subsequent events also may be factored into lost profits estimates. How a company performs after recovering from a breach of contract can help demonstrate how it might have fared “but for” the defendant’s alleged wrongdoing.

Disclosing subsequent events

Be sure to tell us if something major has happened to your business after the valuation date. We can help determine whether the information was “known or knowable” on the valuation and whether exceptions to this guiding principle should apply.

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