Timing is Everything: The Crucial Role of Valuation Date in Business Valuation

In today’s dynamic and often turbulent markets, the value of a business can fluctuate significantly over time. Therefore, selecting the right valuation date is paramount. While sometimes dictated by law or judicial decree, there are instances where individuals are able to choose among various dates.

Understanding the Significance

The valuation date acts as a cutoff point for considering information relevant to estimating the business's value. Typically, events occurring after this date cannot be factored into the valuation, unless they were reasonably known or knowable at the time. However, it's crucial to discern between events directly impacting value and those merely indicating it. For instance, an arm's-length sale or a legitimate third-party offer shortly after the valuation date can serve as objective indicators of value.

Case in Point

A recent Wisconsin marital dissolution case (In re Marriage of Gill, 2023 Wisc. App. No. 2021AP1771, August 29, 2023) underscores the significance of selecting the appropriate valuation date. In this instance, the marital estate included a hair salon that faced temporary closure due to the COVID-19 pandemic, which occurred shortly after the divorce was finalized. The disagreement arose over whether to consider this event in the valuation. While Wisconsin law typically values marital assets as of the divorce date, exceptions can be made. Despite arguments for an alternative date due to pandemic-related disruptions, the courts opted for finality, emphasizing the necessity for closure after a prolonged legal process.

Choosing the Right Cutoff

The suitable valuation date varies based on case specifics and valuation objectives. Consider the following scenarios:

Executors can opt for the date of death or an alternate date six months later. Evaluating fair market value at both dates is advisable, especially if market conditions have significantly shifted. If an estate chooses the alternative date, it must be used for all assets in the estate. In addition, the IRS may consider sales proceeds to be indicative of fair market value if they’re sold soon after the date of death.

2. Divorce Cases

When dividing a marital estate, state law or a judge may dictate whether it’s appropriate to estimate the value of business interests on the filing date, the trial date or an alternative cutoff date that’s based on the end of the company’s fiscal year. In some states, attorneys may request a specific date based on what’s most “fair” to both spouses.

3. Minority Shareholder Disputes

In cases involving dissenting or oppressed minority shareholders, the appropriate valuation date is generally the date immediately preceding the wrongdoing that triggered the litigation. But, depending on state law, a party sometimes may argue for a different date. For example, there might not be sufficient financial data to perform a valuation. Or an unrelated external event may have temporarily increased (or decreased) the business’s value around the time of the alleged wrongdoing.

Conclusion

Selecting the right valuation date is as critical as choosing the valuation method itself. With expertise in tax, legal, and valuation matters, we can assist in determining the most appropriate valuation date based on relevant laws, case specifics, and available data. Ensuring accuracy and fairness in valuation is essential for making informed decisions in various legal and financial contexts.

How HoganTaylor Can Help

If you have any questions about this content, or if you would like more information about HoganTaylor’s Forensic, Valuation & Litigation Support practice, please contact Clay Glasgow, CPA, ABV, CFF, CFE , Advisory Partner. 

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.