What Did the Analyst Know — and When Did He Know It?
December 9, 2015 Valuation

A business valuation is an assessment of a company at a specific point in time. It reflects the circumstances and prospects of the company at a certain date. So what happens when those circumstances change, either for the better or worse, and the value of the company is altered due to an event subsequent to the valuation date?

Generally, the rule is that subsequent events are ignored unless they were “known or knowable” at the time of the valuation. Valuation professionals must carefully distinguish between the facts that could be foreseen at the valuation date and those that could not have been foreseen at the time.

For example, a pending lawsuit (which might impact value negatively) or a signed contract for more work (which might impact value positively) would likely be known or knowable if they existed at the valuation date. However, a fire that destroys the business two weeks after the valuation date would not have been known or knowable. But it’s not always that simple.

Estate of Helen M. Noble

Several court cases relevant to subsequent events have attracted a lot of attention. For example, Estate of Noble v. Commissioner involves the relevance of post-valuation date transactions relative to the value of privately held bank stock in the estate of Mrs. Noble.

At the valuation date, the estate’s analyst presented an appraisal concluding that the fair market value of Mrs. Noble’s minority interest in the bank was $841,000, or $7,250 per share. The IRS challenged that figure, its valuation analyst concluding that the interest was worth $1.1 million, or $9,483 per share. It’s important to note that the estate sold some of its bank stock twice before the valuation date. The first time, 15 months prior to the valuation date, it sold the stock for $1,000 per share, and the second time, two months prior to the valuation date, it sold it for $1,500 per share.

Of particular note, however, is that 14 months after the valuation date, the estate sold the rest of its bank stock — 116 shares — for the precise amount of the IRS valuation: $1.1 million, or $9,483 per share. Why the difference in the price before and after the valuation? One factor is that after the valuation date, the bank decided to pay dividends for the first time, which substantially raised the price of the stock. Did the estate’s valuation analyst know this would happen at the time of the valuation? Was the bank’s intention knowable to him?

Despite the fact that the bank didn’t reveal its plans to issue dividends to the estate’s valuation analyst, the court suggested that the third transaction was relevant because, among other factors, it happened within a “reasonable time” of the valuation date. The court’s eventual conclusion of value was $1.067 million, or $9,276 per share — close to the IRS valuation.

Impact on Valuation

So does the rule hold? Should subsequent events be ignored? Like Noble, several court cases have muddied the waters.

But despite the gray areas, the general rule is that subsequent events that were not known or knowable should not figure into the valuation. It goes without saying that good documentation is essential to defending this position.

If you are interested in further discussion of subsequent events or other valuation issues please contact us.

About the Authors

Mark B. Bober
Mark B. Bober
Partner and Executive Committee Member, Transaction Advisory Services, Valuation Services, Litigation Support


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