I get so involved in dealing with valuation issues that I forget to write about them. I have had the same issue come up a number of times in the past few months: Clients want to know if they can use a valuation for a number of different things. The answer is generally no, because Valuation reports are date specific and purpose specific.
So what does that mean? Date specific is easier to explain. A valuation is a snapshot of a particular type of value as of a specific date. Most people can understand that they would not necessarily buy or sell publicly traded stock based on a price from three months ago. They would make their decision based on today’s price. While the value of a private company may not change significantly over time, it also could change. The value is determined based on the known or knowable facts as of the valuation date. It does not take into consideration changes in the economic climate after the valuation date, or increases or decreases in revenue. Either of these factors could result in a change in value from one date to another.
Valuations are also purpose specific. Some different purposes could be gifting an interest, the value of a business for a divorce or the value for a dispute with a shareholder. Since different types of value may be used for different purposes, the resulting values may be different. For example, a gift of a 10% interest (minority and non-marketable) could not be used to estimate the value of 55% interest of the company (control and non-marketable) for purposes of a shareholder. The minority interest may have been reduced by discounts for lack of control, whereas a 55% interest would usually not have a minority discount applied. The discount for lack of marketability for a 10% interest could be different than for a 55% interest, and in some shareholder disputes, state statutes may dictate that no adjustment be applied. This example also indicates that two interests, a minority and a controlling interest could have different per share values based on other factors as well. Appraisal reports state that they are for a specific valuation date, valuating a specific identified interest and for a specific purpose. This is so that an uniformed user would not mistakenly misuse the valuation report and reach an inappropriate conclusion.
© 2010 Florida Business Valuation Group
