In today’s uncertain markets, the value of a business may change significantly over time. So it’s important to choose the valuation date carefully. Often, the date is prescribed by law or a judge. But sometimes attorneys or others, such as the executor in an estate valuation, are allowed to decide between different dates.

A fundamental decision

The valuation date serves as a cutoff for the information that can be used to estimate value. In general, valuators can’t consider any events that happen after the valuation date, unless the information was “reasonably known or knowable” on the valuation date.

However, there’s a key distinction between events that affect value and those that are indicators of value. For example, a valuator may consider an arm’s-length sale or bona fide third-party offer that occurs within a reasonable time frame after the valuation date as an objective indication of value.

Case in point

The appropriate valuation date was a contentious issue in a recent Wisconsin marital dissolution case (In re Marriage of Gill, 2023 Wisc. App. No. 2021AP1771, August 29, 2023). Here, the couple’s marital estate included a hair salon that was forced to temporarily close during the COVID-19 pandemic. The shutdown — which happened shortly after the divorce was finalized — adversely affected the business.

In Wisconsin, marital assets are generally valued as of the date of divorce, but courts may deviate from this general rule under special circumstances. The spouse who owned the business argued that the pandemic presented special circumstances that warranted using an alternative date. But the circuit court disagreed, ruling that there must be “some finality for all the parties” in this case. The appellate court upheld the decision, noting that the lower court’s ruling was rational because the divorce had been pending for more than two years.

Picking the right cutoff

The appropriate valuation date varies based on case facts and the purpose of the valuation. Here’s some general guidance to consider when choosing a valuation date in the following situations:

Estate tax valuations. Executors can decide to use the date of death or an alternate valuation that occurs six months later. It usually makes sense to estimate fair market value at both dates — or at least to evaluate whether market conditions have changed materially between the dates. If an estate chooses the alternate date, it must be used for all assets in the estate. In addition, the IRS may consider sales proceeds to be indicative of fair market value if they’re sold soon after the date of death.

Divorce cases. When dividing a marital estate, state law or a judge may dictate whether it’s appropriate to estimate the value of business interests on the filing date, the trial date or an alternative cutoff date that’s based on the end of the company’s fiscal year. In some states, attorneys may request a specific date based on what’s most “fair” to both spouses.

Minority shareholder disputes. In cases involving dissenting or oppressed minority shareholders, the appropriate valuation date is generally the date immediately preceding the wrongdoing that triggered the litigation. But, depending on state law, a party sometimes may argue for a different date. For example, there might not be sufficient financial data to perform a valuation. Or an unrelated external event may have temporarily increased (or decreased) the business’s value around the time of the alleged wrongdoing.

(This is Blog Post #1522)