Subsequent Events in Valuation
Typically, a valuation should only consider events and facts that were “known or knowable” as of the valuation date. This means that events that occur or information that becomes known after the valuation date should not enter into the valuation analysis or conclusion – if neither the buyer nor the seller could have been aware of a certain fact or event, then it could not have entered into their assessment of the company’s value.
However, there are often clear signs that an event that occurred after the valuation date was knowable or foreseeable as of the valuation date. For example, if some new regulation or tax law was being considered by a government agency as of the valuation date, but had not yet been established or enacted, it is proper for the appraiser to consider the uncertainty about future revenues and profits that this presents. Likewise, if a contract with a significant client expires at year end, and negotiations to renew have an uncertain outcome, the potential future loss of the client should be considered by the appraiser – it would surely be considered by a hypothetical buyer. Of course, if the client announces its decision not to renew the contract, the actual future loss of the client should be considered as well.
How, exactly, a potential subsequent event (negative or positive) should be included in the analysis would depend on the circumstances. It could be achieved by appropriately adjusting the company’s revenues and profit, or, alternatively, by changing the assessment of risk. Risk assessment can be modified either by changing the required rate of return (discount rate) in the income approach, or by changing the pricing multiple used in the market approach.
Regardless of the nature of the known or knowable subsequent event, the appraiser’s report should adequately describe the event, the information that would lead a prudent businessperson to become aware of it, and how its potential impact on value was incorporated in the analysis.