What kinds of hassles do you encounter when the valuation date is different from the fiscal yearend date? For holding entities like FLPs, it is easy to get net asset value as of the valuation date and proceed from there, and there are not too many difficulties.
But for operating companies, if the valuation date is May 13 and the fiscal year ends December 31, there are probably no partial year financials as of May 13. Do I use April 30, March 31, or maybe even the previous December 31, if there are no monthly or quarterly statements? The balance sheets as of those prior dates may be very different from that on the valuation date. Moreover, I will have to work with two partial years: an actual part year to May 13 and a forecast (May 14 to December 31). Questions of seasonality as well as material year-end adjustments always arise. Revenue, working capital needs, and debt often vary greatly during the year. So there is a great deal more work associated with setting up the financial forecast, probably several hours, and this is not the kind of work that is visible to the client (i.e. the basis for a higher fee!).
In addition, there are difficulties with discount rates. Treasury bond rates are updated daily, Ibbotson data quarterly, but most people just use the annual Ibbotson results. What do we do for an interim date? And if we are going to use part years as above, we have to convert annual discount rates to their part-year equivalents. Again, more invisible work.
Let me be the first to state that the invisible work on the forecast and discount rate is technically the “right” way to proceed. I would applaud anybody who actually did it this way, strictly by the book. I do it myself if the engagement involved a business interest of substantial value, on the assumption that my work would be reviewed by a highly technically trained auditor or adversarial expert.
My bread and butter valuations, however, involve family businesses with total values of a few million dollars at most, and most are gift and estate valuations of minority interests that are worth considerably less. My fees (which are probably too low to start with) really do not allow me to spend many extra hours on partial-year valuation date problems. So what can I do about it?
- See if the valuation date can be moved to (previous) fiscal yearend. This is often easily done for gifts. Plus, if clients make gifts on December 31 and the following January 1, they can use the same valuation…and they love two-fers!
- Move the valuation date up to the next yearend. This is great, but you may delay your work and fees a little bit.
Changes of valuation date eliminate all partial year problems. But for estate taxes, the valuation date is date of death (or the alternate date) and those are etched in stone. Here, my favorite tool is the “no material change” assumption. If I can show that there was no material change in the business or its financial position from (as above) December 31 to May 13, then I infer that the valuation did not change. Since that is the case, I can effectively do the valuation as of the previous December 31 (effectively moving the date back) and eliminate part-year problems. This turns out to be easily demonstrable most of the time, and I have never had a problem with an IRS audit when I have proven and invoked “no material change”. If there has been a material change (e.g. a big customer was lost, a lawsuit won, or the stock market / economy went down … hint hint …) then I am back to my part year problems.