Most “Old Economy” industrial businesses I have valued recently were hurt by the 2008 recession, while most “New Economy” technology businesses were early-stage ventures that were evolving rapidly. In neither case were historical financial results of much use in forecasting results. Nevertheless, I dutifully gathered, analyzed, and reported them.
I started wondering about the source of the rule about considering five years of historical results. I learned this in my appraisal courses, and the earliest citation I can find is in Revenue Ruling 59-60, Section 4, Paragraph 2(d). In 1959, after a very tranquil decade, a five-year look-back was certainly useful. Today, not so much!
Revenue Ruling 59-60 has certainly stood the test of time. Most of its guidance remains valid today. I think its most perceptive suggestion is that appraisers use “common sense, informed judgment, and reasonableness” (Section 4, Paragraph 3.17).
My valuation teachers recommended that I reread Revenue Ruling 59-60 often. I do so. Every reading gives me new insights!