How valuation dates are impacted by Covid-19

The timing of the valuation date is more important now given the economic changes caused by Covid-19.  

All valuations are performed at a point in time.  Valuations in the context of family law and the purchase and sale of a business generally consider facts up to the report or transaction date (a “current date” valuation).

Historical valuation dates are often used for corporate reorganizations / tax planning transactions, shareholder disputes, and establishing the value of family assets at the commencement of a marriage or common-law relationship, amongst other reasons.

A key valuation principle is that the use of hindsight is not permitted.  This means that if the valuation date is December 31, 2019, for example, the valuator can only consider facts known up to and including that date, but not beyond.

Given the rapid change in economic and business conditions caused by Covid-19, there would likely be a difference in value in many businesses between December 2019 versus April 2020. 

Going forward, the change in a business’s value will largely reflect changes in expectations about the future.  Value could increase even with poor operating performance in the interim period if expectations about the timing and extent of economic recovery are optimistic.  On the other hand, value could decrease despite reasonably strong interim performance if mid to longer term negative impacts of Covid-19 are expected to be significant.

It may be tempting to defer a valuation because of the current uncertainty.  Any delays waiting for more clarity could be significant given it will likely be in excess of a year (and perhaps years) before stabilized financial information about businesses in the post-Covid-19 period is available. 

Moving forward without certainty is not easy.  In a matrimonial context, how will the parties agree on when there is sufficient information to proceed?

As previously noted, in a family law context, the valuation date is often set on or about the date the valuation report is issued (a current date).  This has several implications:

• Waiting for a return to normal in Phase 4 of BC’s Restart Plan before performing the valuation may not be realistic.  While there are more unknown factors now, valuators have methodologies that can be used to form reasonable conclusions of value and allow parties to move forward with their lives.
• Previously issued “current date” valuation conclusions, even those issued in early 2020, may not represent the value of the business today.  Previous valuations may need to be revisited in the context of the “new normal” to allow parties involved to find a reasonable resolution to their situation.
• Not unlike pre-Covid-19 valuations, business valuations should be started well in advance of any mediation or trial dates, allowing parties to provide fulsome input during the valuation process and assess conclusions.  While the economic situation will continue to evolve, it is prudent to give parties as much time as possible to digest the results within the context of this new normal, with the aim of reaching out of court resolutions.

If you are reviewing the work of a valuator, you should consider asking the following questions:

• Has the valuator taken into consideration the facts known as at the valuation date including the impacts of Covid-19 and any government programs designed to mitigate impacts?
• Has the valuator used hindsight (using facts known after the valuation date, when the valuation date is set at a date other than a current date) in forming his/her valuation conclusions?
• Is the multiple applied appropriate for that valuation date?  This issue will be explored more extensively in a subsequent article.