Why is business valuation date important?

Take a look at a professional business appraisal report and you will see the valuation date prominently displayed. Clearly, business appraisers deem this date worthy of mention. Why is this the case?

Business value changes over time

Business value can change quite a bit depending on circumstances that change over time. If you pay attention to the public stock market you will spot the ups and downs in prices as investors become aware of new company information and fluctuations in the economy.

An abrupt drop in company’s profits is a cause for concern and can depress its value significantly. If businesses can’t get required capital on attractive terms, their ability to invest for the future could be impaired. The result is often lower earnings and a drop in business value. A major customer departure could put a kink in a company’s sales and knock its value down.

Beware of valuation multiples that are out of date

If your valuation uses the market approach, comparison to similar companies should be done in a timely manner. Market comps depend critically on your ability to assess the current values of similar companies relative to their revenues, profits, asset bases or equity. As the market sentiment changes, so do the relationships between business financial performance and its value. Stale valuation multiples are one reason business valuations go south.

Business valuation repeated at different times

To make things even more interesting, your business valuation may be done as of several dates. This is common in divorce cases when the parties seek to establish how much business value has changed over the course of marriage of the business owners.

In the unhappy scenario of having to do a business appraisal for litigation, the court may determine what dates you should use. Before taking on the job, consider carefully whether you can do business valuation as of the dates the court wants. You may have little choice but to comply and your ability to complete the valuation engagement could prove critical to your client’s success.

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