Doing Valuations in the Past

Why would you want to do business valuations in the past? Indeed, most business valuations are done as of the current date. The idea is to figure out what a company is worth right now.

Yet once in a while, you may need to establish what the business was worth at some point in time in the past. A typical example is divorce with both spouses involved in the business but only one being the original founder.

The court may want to establish the amount of compensation for the departing spouse by figuring out what each spouse contributed to the company over the years they were married. To do this, you would need to establish two business values: one just before the marriage and then the value at the time of divorce. The difference is the value presumably created with participation of both spouses in the business.

So how do you go about valuation at such different points in time? While the valuation methods you can use in calculation can be the same for both the historic and current analysis, the data you would use for inputs would likely be quite different. For example, your historic financials and forecasts of earnings and expenses would have two different time lines. In addition, the historic cost of capital data such as the discount and capitalization rates as well as valuation multiples are likely to differ over time.

How could this change the business valuation results? As an example, consider the discounted cash flow method. Your earnings forecasts and earnings growth rate are likely to be different, especially over a long period of time. Moreover, the market years ago could support the discount rate that does not look anything like the current number.

Earnings and discount rates change over time

This difference in the earnings and discount rate is likely to produce very different business value results. The difference may be a positive number which means the spouses ran a successful growing company. The wealth they have created over the years is theirs to share.

The same reasoning applies to any other business valuation method. A good example is valuation multiples you may use to compare your company to its industry peers. The market participants, i.e. business buyers and sellers, establish business selling prices every day. So it is possible that companies in a particular industry have become more desirable of late and tend to command higher valuation multiples than in the past. Again, the result is that you company may be more valuable today.

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