Did you hear that? That loud sigh of relief? That was me exhaling now that it is official that football will be on my TV screen during Sunday afternoons this fall. Now that teams are wrapping up the mad scramble to add free agents and resign players, the football world’s collective thoughts naturally turn to which team is the favorite to win the NFL championship. At the beginning of the year, there are always a number of teams that the pundits believe have a good shot at making a title run. As the year progresses, however, only a handful of those teams typically live up to the hype – and a few surprise teams often jump into the mix, as well. Obviously, your odds of guessing the champion during Super Bowl week are much greater than making that same guess when training camp opens. The passage of time proves whether the predictions made at the start of the season come to fruition. Therefore, the date at which you pick the potential champion can significantly impact your choice based on what you know has occurred in the time leading up to your pick.
Oftentimes, people have a misconception that the values of privately-held businesses stay relatively stagnant since there are often not regular transactions in their stock. The values of privately-held businesses can change just as dynamically as the values of publicly-traded companies, though. As a result, the valuation date for any engagement plays an important role in the final determination of value. For instance, consider the value of a start-up company that has no operating history and is in its formative stages. The company may have little to no value at this point because the likelihood of it turning into a successful enterprise is generally unclear and unproven (sort of like picking a team in “rebuilding” mode to win the championship instead of a proven contender). On the other hand, if we revisit that same company one/two/ten years later, it may have evolved into an established enterprise that possesses a significant amount of value (think of the New England Patriots going from laughing stock of the 1990’s to the powerhouse of the 2000’s). Alternatively, a promising company may also sputter and die before reaching its goals, as well (the Dallas Cowboys of the 2000’s).
The passage of time answers many questions in both the world of football and the world of business valuation. Valuation analysts complying with professional standards can only consider facts that were “known or knowable” as of the valuation date in reaching a conclusion of value. Therefore, unless the signing of a specific contract or hiring of a particular person was “known or knowable” as of the valuation date, it cannot be assured that such events would have taken place if we put ourselves in the shoes we were in at that point in time. Future events, however, can provide a sort of “reasonableness check” for management’s estimates and projections as of the valuation date. Blindly relying on optimistic estimates that end up falling far short of what was projected (picking the Browns to win the Super Bowl) is not as likely to be perceived as reliable as reasonable projections that are actually achieved (picking the Eagles to win the Super Bowl).
Just as the date on which you pick the eventual Super Bowl champion plays a significant role in what team you may chose, the valuation date used in a business valuation can also impact the concluded value of an entity. Understanding this concept at the outset of a valuation can make the process and, ultimately, the concluded value, easier to follow.
To learn more about the importance of business valuation dates, leave a comment below, or contact Sean Saari in Skoda Minotti's Business Valuation Services Group by calling 440-449-6800.