When valuing a closely held business, events that happen after the valuation date are generally not included in the analysis. However, there are important exceptions. In some situations, business valuation professionals may need to consider subsequent events, also known as ex post facto information, when evaluating what was known, knowable, or relevant as of the valuation date.
Reasonably Foreseeable Events
The first exception relates to subsequent events that were reasonably foreseeable on the valuation date. When estimating fair market value, hypothetical willing buyers and sellers are presumed to have “reasonable knowledge of relevant facts” affecting the value of a business interest.
In addition to facts that are publicly available, “reasonable knowledge” includes facts that a buyer would uncover over the course of private negotiations over the property’s purchase price. During normal due diligence procedures, a hypothetical buyer is expected to ask the hypothetical seller for information that’s not publicly available and to review the subject company’s financial statement disclosures.
Examples of potentially relevant subsequent events are bankruptcy filings, the loss of key people, cyberattacks, natural disasters, and mergers and acquisitions. Not all of these examples would be reasonably foreseeable. For instance, you can’t predict when your business will be affected by a tornado or a data breach.
However, some events may be foreseeable by an informed investor. To determine what was “known or knowable” on a valuation date, experts must put themselves in the shoes of hypothetical buyers and sellers on that date and consider how they would have perceived the situation. For example, if the subject company’s founder was in hospice on the valuation date and died two months later, the loss of this key person might be considered reasonably foreseeable.
Indicators Of Value
Another exception applies when an unforeseeable subsequent event provides an indication of the subject company’s value. In addition to an outright sale of the business, this information might include third-party offers and transfers of ownership interests (such as partner buyouts or stock repurchases). Relevant events are generally those that occur at arm’s length and within a reasonable period after the valuation date.
For example, in a landmark case — Estate of Jung v. Commissioner (101 T.C. 312, 1993) — the U.S. Tax Court ruled that actual sales prices received for property after the valuation date may be considered when valuing a business interest, “so long as the sale occurred within a reasonable time … and no intervening events drastically changed the value of the property.” This ruling differentiates subsequent events that affect fair market value from those that provide an indication of fair market value.
However, indicators of value aren’t always determinative, especially if they involve different-sized business interests or rely on a different standard of value, such as strategic value or fair value. For instance, suppose a closely held business awarded stock options to its CFO after the valuation date. In this situation, the exercise price might provide evidence of the value of a noncontrolling interest, but it might not be particularly useful in determining the value of the entire business.
Fairness Considerations
Despite the general rule against considering subsequent events that affect value, courts sometimes make other exceptions in the interest of fairness. Suppose, for example, that divorcing spouses agree to use the filing date as the valuation date for all marital assets, including a business owned by one of the spouses. What if the business’ offices are destroyed in a fire after the filing date but before the court date?
In divorce cases, the applicable standard of value is typically “fair value” as defined under applicable state law. Depending on the statutory definition of value and case facts, the court might consider the fire’s impact when dividing the marital estate or determining support, even though the event wasn’t known or knowable on the valuation date.
Subsequent Events In Business Valuation
Subsequent events are one of the gray areas in business valuation. What’s relevant depends on the facts and circumstances. However, one point is clear: Business owners and their attorneys should openly share this kind of information with their valuation experts. From there, an experienced expert can help determine whether an event is relevant, assess its impact on value, and explain how it should be addressed in the valuation report. Contact us to learn more.
