The pandemic has had a significant impact on the value of businesses—some positive, some negative—which presents extra challenges for valuation professionals. One issue involves valuation date and “subsequent events.”
Valuation analysts typically ignore subsequent events unless they were “known or knowable” at the valuation date. Valuation analysts must carefully distinguish between facts that could and could not be foreseen at the valuation date.
The Magic Date
For fair market valuations done in the past few years—most of which COVID has impacted—valuation analysts have had to determine on which date the pandemic was known or knowable and how that knowledge impacted the business. Most experts agree that the pandemic was not known nor knowable as of December 31, 2019. But for valuation dates after that, determining whether the pandemic was known or knowable is not straightforward.
Valuation authority James Hitchner and others have studied this question closely and provided considerations for fellow valuation professionals. In fact, Hitchner and his colleague Karen Warner comprised a comprehensive timeline of significant COVID-related events, including the pandemic’s effects on the U.S. stock market.
This timeline, available to all valuation analysts, starts at the end of 2019, when dozens of people in Wuhan, China were treated for pneumonia, but authorities cited “no evidence of person-to-person spread.” The next entry is January 9, 2020, when Chinese authorities identified a novel coronavirus and reported 59 cases. Hitchner’s timeline continues almost daily for months.
This research has led Hitchner to identify February 24, 2020, as the “magic date,” when the pandemic was likely known or knowable in the U.S. At that point, the U.S. had 35 cases, President Trump asked Congress for $1.25 billion for coronavirus response, and the Dow Jones Industrial Average dropped 1,000 points—the worst drop in two years.
However, Hitchner stresses that there is no single date that is relevant to all valuations for determining when the virus was known or knowable. In every valuation, the outcome depends on the specific facts and circumstances of the company in question. For example, companies selling to local customers and using local suppliers were likely in a different situation than those relying on foreign supply chains for delivery of raw materials and goods.
Other valuation professionals have generated similar frameworks and indicators that help in evaluating the effects of the pandemic on business value, from political and demographic influences to environmental and technological issues. All stress the importance of paying attention to individual company facts and circumstances.
If a pre-COVID valuation is n0t useful for the purpose of the valuation, Hitchner suggests undertaking two valuations using the same valuation date—one with COVID-19 as a factor and one without.
Hitchner believes this approach, using a hypothetical situation with and without the pandemic, complies with valuation standards from the American Institute of Certified Public Accountants’ Statement on Standards for Valuation Services and the Uniform Standards of Professional Appraisal Practice and would therefore be considered legitimate in valuation circles.
The pandemic has reduced the value of some assets but also increased the value of others. Given the challenges that COVID-19 has introduced, it is imperative to work with an experienced valuation professional in evaluating a business.
If you have questions about COVID-19 and valuation, our business valuation team is here to help.
Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.