As previously discussed in the article Date of Valuation, the date of the valuation can have a significant impact on a final business valuation. The primary concept at issue has to do with what is known or knowable on the date of valuation. This concept is simple yet powerful, and for this reason, it warrants further examination. Therefore, let’s take a look at a hypothetical situation.
For this scenario, the company is a local ice cream shop, Scoops, that has been in business for the last forty-five years. Scoops is a family owned business that produces its ice cream in-house and is known for their outstanding customer service. Their reputation extends across numerous states, thanks in part to press coverage and online reviews. With a flourishing business, everything seemed to be going great for the owner and his wife. That is until May 7th, 2016 when they decided it was time for them to separate.
While they mourned the separation, things continued to get worse for the owner. About two months later, on July 18, 2016, a bad thunderstorm occurred causing a major power surge resulting in damage to the ice cream production equipment. After getting numerous estimates to repair the old equipment, it became apparent that the costs were going to be too high, making purchasing new equipment the most economical solution. The new equipment soon arrived and It did not take long for it to be installed and new batches of ice cream to be produced. Unfortunately, the newly made ice cream clearly was not the same. Many tests were conducted and changes were made, but nothing could come close to what it was before. The ice cream was still good, but there was just something different. After much consideration, the owner concluded that the missing element was related to the specific characteristics of the older equipment and couldn’t be reproduced with the new equipment. Without a viable alternative, the decision was made to move forward and start selling the new ice cream.
Everyone in the community was excited to get back to being able to eat the familiar Scoops ice cream. After the initial excitement died down,it did not take long for people to start posting reviews stating that the ice cream just wasn’t the same. As the disappointed customers grew, the number of new positive reviews declined and so did the mentions in the press about how great Scoops was. Over the next year, business slowed, which greatly affected the bottom line.
With a divorce looming, the wife’s attorney requested that a business valuation be completed for property distribution purposes. The date of the valuation report would be May 7th, 2016 since that was the date of the separation. From the valuator’s vantage point several years after the fact, he knew the events that came after the separation and understood that those events had a negative effect on the business. However, on the separation date, there was no way for anyone to know what was to occur a few months later. The events to follow were not knowable to anyone. Therefore, they cannot be included in the valuation report. The resulting bottom line showed a value higher than it would have been if the date of valuation had been a little further into the future.