Another theme of my posts has been the relevance of information obtained subsequent to the valuation date in fair market value appraisals. Revenue Ruling 59-60, Section 3, Paragraph 3 tells us that information known or reasonably knowable as of the valuation date is relevant and must be considered (and disclosed in our reports). “Information” is data, which includes both events (e.g., a subsequent offer to purchase the company) and facts (e.g., next year’s financial results).
Court decisions as well as common sense, informed judgment, and reasonability (three factors mentioned in Revenue Ruling 59-60) suggest that information that becomes available AFTER the valuation date that AFFECTS value is not relevant, while information that INDICATES value is relevant.
How do we make sense of that?
Information that AFFECTS value changes our opinion from what it would have been had we known it as of the valuation date. If it was indeed not known or reasonably knowable as of the valuation date, it would NOT be relevant. Some examples:
- A key company employee is disabled due to a traffic accident.
- A strategic buyer offers to acquire the Company. (Strategic synergy is not part of fair market value.)
Information that INDICATES value does not change our opinion from what it would have been had we known it as of the valuation date. It just confirms it, and IS relevant. Some examples:
- A financial buyer offers to acquire the Company. (Financial buyers are envisioned by fair market value.)
- The Company negotiates an arms’-length redemption of shares.
The relevance of subsequent information that INDICATES value rests on an implicit, but very important, assumption: that there is or was “no material change” in the business or financial position of the Company between the valuation date and the date on which the subsequent information became available. Let me explain this with some common examples.
A client wants to transfer business interests to his children on December 31. The latest financial statements are as of November 30. December 31 statements (the valuation date) will not be available until March of 2010, beyond the customary 60-day grace period for gift tax returns. The client represents that there has been no material change in his business from November 30 to today (December 15) and he expects none to occur through yearend (or through March of next year, for that matter.) Accordingly, I will value the business using November 30 actual results and a projection through December 31 (assuming no material change), with a valuation date of December 31.
Data availability lags like this are a classic example of subsequent information that indicates value.  Although financial statements (and economic and industry data, for that matter) are not often available until after the valuation date, in practice we often pretend that they were available as of then. (If it is now April 2010 and yearend 2009 financials are available, I would have no problem doing a valuation as of December 31, 2009 using them, and neither would anybody else.)
Now, with the same facts as above, it is April of 2010 and a financial buyer appears out of the blue and makes an offer to buy the Company. Nothing material has indeed changed. In my opinion, the offer INDICATES fair market value (the buyer is financial) and SHOULD be considered in a valuation as of December 31, 2009.
The obvious remaining question is: for how long after the valuation date (assume it is December 31, 2009) might subsequent information that INDICATES value be relevant? Putting it all together, it rests on the no material change assumption. I think we would all agree that, if the financial buyer offer were received on January 15, it would be relevant. What if it were received on March 31? June 30? A year later? The longer the interval between the availability of subsequent information and the valuation date, the more probable it is that something material has changed, and the less relevant the subsequent information will probably be.
I wish I could be very specific and give you a bright line time limit on subsequent information, but I cannot. Reasonable, honest, and competent appraisers can have legitimately different opinions about this; every case is different. That is what makes this so interesting!