Subsequent Events in Business Valuation

“ Valuation and Financial Forensics – Educate, Communicate, Preserve” NACVA and IBA’s Annual Consultants’ Conference Subsequent Events Academic Track and Z. Christopher Mercer, ASA, CFA present May 27-30, 2009 Boston, MA

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Subsequent Events Z. Christopher Mercer, ASA, CFA

Definitions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Subsequent Event ,[object Object],[object Object],[object Object],[object Object]

Subsequent Events ,[object Object],[object Object],[object Object]

Valuation Date Perspective Valuation Date Timeline Company history Industry condition Public market conditions Management team Economic conditions Competitive situation Company situation Company outlook The past is the window through which we view the uncertain future – Your Speaker Valuation is a prophecy – RR 59-60, Judge David Laro The future is hard to predict. It hasn’t happened yet – Yogi Berra

Valuation Date Perspective Investment Date (Funds are committed) Timeline Company history Industry condition Public market conditions Management team Economic conditions Competitive situation Company situation Company outlook Regardless of what happens after the investment, the investor gets the results that the market provides What will be the investment result? Price will go up Price will go down Price will stay about the same

Revenue Ruling 59-60 ,[object Object],[object Object]

Definitions ,[object Object],[object Object],[object Object],[object Object],[object Object]

Fair Market Value ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],This is the standard of value in all gift and estate tax matters as well as many other matters

Future ,[object Object],[object Object],[object Object]

Future Events From the Perspective of a Valuation Date ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Unexpected events can change value relative to that which existed at a given valuation date

Future Events From the Perspective of a Valuation Date ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Future Events From the Perspective of a Valuation Date ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],No one, particularly the appraiser, knows when a “reasonably foreseeable” event might occur

Uncertain ,[object Object],[object Object],[object Object],[object Object],[object Object]

Uncertainty ,[object Object],[object Object]

Future Events From the Perspective of a Valuation Date Valuation Date Timeline Company history Industry condition Public market conditions Management team Economic conditions Competitive situation Company situation Company outlook Unexpected events??? Possible events??? Reasonably foreseeable???

Reasonably Foreseeable (at a Valuation Date) ,[object Object],[object Object],[object Object],[object Object],[object Object],Appraiser must reach conclusions in face of uncertainty

Reasonably Foreseeable (at a Valuation Date) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Appraiser must reach conclusions in face of uncertainty

Two Kinds of Appraisals ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Historical Appraisals Historical Valuation Date Timeline Company history Industry condition Public market conditions Management team Economic conditions Competitive situation Company situation Company outlook Unexpected events??? Possible events??? Reasonably foreseeable??? Report Date

Historical Appraisals ,[object Object],[object Object],[object Object]

Known or Reasonably Knowable ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Reasonable Knowledge ,[object Object],[object Object],[object Object],[object Object],[object Object]

Reasonable Knowledge ,[object Object],[object Object],[object Object],[object Object]

Investments and Uncertainty ,[object Object],[object Object]

Reasonably Foreseeable ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Business Valuation Standards and the Future ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Institute of Business Appraisers ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

NACVA ,[object Object],[object Object],[object Object]

USPAP ,[object Object],[object Object],[object Object]

USPAP ,[object Object],[object Object],[object Object],[object Object]

USPAP ,[object Object],[object Object],[object Object],[object Object],[object Object]

USPAP ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Difficult to follow this guidance using post-valuation date information

USPAP ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],A little “loose” but it is clear that the preferable vantage point is that of the effective date of the retrospective appraisal

American Society of Appraisers ,[object Object],[object Object]

American Society of Appraisers ,[object Object],[object Object],[object Object]

AICPA ,[object Object],[object Object],[object Object],[object Object]

Valuation Texts ,[object Object],[object Object]

Valuation Texts ,[object Object],[object Object],[object Object]

Valuation Texts ,[object Object],[object Object],[object Object],[object Object],In my opinion, Gary leaves too much wiggle room for comfort. I’m not willing to make valuation decisions based on what I think might be “fair and equitable” in the context of a fair market value determination

Other Texts ,[object Object],[object Object],[object Object],[object Object]

Ithaca Trust v. United States 279 U.S. 151 (1929) ,[object Object]

Other Texts ,[object Object],[object Object],[object Object]

Definition ,[object Object],[object Object],[object Object]

Per Laro & Pratt, subsequent events should not be taken into account unless at least one of the following is true: ,[object Object],[object Object],[object Object]

Per Laro & Pratt, subsequent events should not be taken into account unless at least one of the following is true: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Per Laro & Pratt, subsequent events should not be taken into account unless at least one of the following is true: ,[object Object],[object Object],[object Object],[object Object],[object Object]

Per Laro & Pratt, subsequent events should not be taken into account unless at least one of the following is true: ,[object Object],[object Object]

Subsequent Events per Laro/Pratt ,[object Object],It Is What It Is Because I Say It Is! Fair Market Value?

Formula for “Time Adjustments” ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Looking at the “Time Adjustment” Formula ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Looking at the “Time Adjustment” Formula ,[object Object],[object Object],[object Object]

Looking at the “Time Adjustment” Formula ,[object Object],[object Object],[object Object],[object Object],[object Object]

Looking at the “Time Adjustment” Formula ,[object Object],[object Object],Or, that the appraiser (or the court) can pick and choose from among the many subsequent events that surely have happened between the valuation date and a later report date

Estate of Noble ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Estate of Noble ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Estate of Noble ,[object Object],[object Object],[object Object],[object Object]

Estate of Noble ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Estate of Noble ,[object Object],[object Object],[object Object],[object Object],Additional Facts – Estate sold block prior to filing of Form 706 – Estate filed Form 706 at $7,793 per share, or $903,982 for block

Noble – Appraisals Cued up for Court to examine Marketability Discount?

Noble – Court’s “Valuation” ,[object Object],[object Object],[object Object],[object Object],[object Object]

Noble – Court’s “Analysis” of Appraisals ,[object Object],[object Object],[object Object],[object Object],[object Object]

Business & Valuation Perspectives ,[object Object],[object Object],[object Object],[object Object],[object Object]

Business & Valuation Perspectives ,[object Object],[object Object],[object Object]

Conclusion ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Subsequent Events in Business Valuation

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