The timing of the valuation date is more important now given the economic changes caused by Covid-19.
All valuations are performed at a point in time. Valuations in the context of family law and the purchase and sale of a business generally consider facts up to the report or transaction date (a “current date” valuation).
Historical valuation dates are often used for corporate reorganizations / tax planning transactions, shareholder disputes, and establishing the value of family assets at the commencement of a marriage or common-law relationship, amongst other reasons.
A key valuation principle is that the use of hindsight is not permitted. This means that if the valuation date is December 31, 2019, for example, the valuator can only consider facts known up to and including that date, but not beyond.
Given the rapid change in economic and business conditions caused by Covid-19, there would likely be a difference in value in many businesses between December 2019 versus April 2020.
Going forward, the change in a business’s value will largely reflect changes in expectations about the future. Value could increase even with poor operating performance in the interim period if expectations about the timing and extent of economic recovery are optimistic. On the other hand, value could decrease despite reasonably strong interim performance if mid to longer term negative impacts of Covid-19 are expected to be significant.
It may be tempting to defer a valuation because of the current uncertainty. Any delays waiting for more clarity could be significant given it will likely be in excess of a year (and perhaps years) before stabilized financial information about businesses in the post-Covid-19 period is available.
Moving forward without certainty is not easy. In a matrimonial context, how will the parties agree on when there is sufficient information to proceed?
As previously noted, in a family law context, the valuation date is often set on or about the date the valuation report is issued (a current date). This has several implications:
If you are reviewing the work of a valuator, you should consider asking the following questions: