Monday Morning Quarterbacking in Business Valuations

As business valuation experts, we are often retained to provide a conclusion of value as of a date that is in the past.  For example, valuations for estate tax filings often use the date of death, which can be as much as a year in the past.  Valuation dates for litigation cases can be even further in the past.

Normally, using hindsight is discouraged in business valuations — the expert is cautioned against considering hindsight his/her conclusion of value.  The American Institute of Certified Public Accountants (AICPA) issued a Statement on Standards for Valuation Services saying: “Generally, the valuation analyst should consider only circumstances existing at the valuation date. An event that could affect the value may occur subsequent to the valuation date; such an occurrence is referred to as a subsequent event. Subsequent events are indicative of conditions that were not known or knowable at the valuation date, including conditions that arose subsequent to the valuation date. The valuation would not be updated to reflect those events or conditions.”

Of particular concern to the valuation expert is a client’s potential bias resulting from their preference for a particular outcome.  For example, if the valuation is for an estate tax filing, the client may be seeking a low valuation to avoid estate taxes.  This could cause the client to provide projections of “future” performance, subsequent to the valuation date, that are low compared to what management would have likely forecast at the time of death.  This could be exacerbated if the expert were to take into account the company’s actual performance after the valuation date which may have been negatively impacted by events that were unknown and unknowable as of the valuation date.

In litigation cases that seek a valuation for a date many years in the past, the valuation analyst must diligently guard against allowing subsequent events to influence his/her conclusion of value.

This is not to say there are no legitimate circumstances where the use of hindsight is appropriate, but that is a topic for a subsequent blog.