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Factors to Consider Regarding Valuation Events

Business valuators sometimes consider major events that take place after the valuation date, which could include events such as filing for bankruptcy, new technological advances, data breach, or fraud. Such impactful events could potentially affect a business’s fair market value, but consideration for certain events 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 — if 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 an organization’s value. For example, suppose that the parties in a divorce case stipulate 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 an organization 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 Valuation Events

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

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