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For What It’s Worth: Hindsight Is Not an Option – June 2016

My next few monthly letters will discuss aspects of the fair market value standard governing tax-related valuations. Its foundation is Revenue Ruling 59-50, a six-page document downloadable free from many sources. My appraisal teachers strongly recommended rereading it often, and I have done that for 30 years, invariably gaining new insights each time.

A common issue I deal with is in Section 3, Paragraph 3 of the Ruling, which states in part that:

“Valuation…must be based on facts available at the required date of appraisal.”

  1. “Available” means “known or reasonably knowable”
  2. The “required date of appraisal” is the date as of which the interest is valued (the “valuation date”), not the date on which the valuation report is prepared (the “report date”).

This has several important implications:

  1. Hindsight is impermissible – unforeseeable events (such as unsolicited offers to buy or material changes in economic / capital market / industry conditions or business / financial positions are not relevant. A reasonably informed buyer / seller could not know of or consider such events. Neither can an appraiser!
  2. Having said that, the possibility, however remote, of material subsequent events that could affect value must be disclosed, considered, and appropriately weighted in valuation reports. This requires common sense, informed judgment, and reasonableness. There is a big difference between a business owner who is “thinking about selling” and one who has retained Western Reserve Partners to find buyers!
  3. “Reasonably knowable” allows some subsequently available information to be used retrospectively. On the December 31, 2015 valuation date, a company’s 2015 financial results as well as annual 2015 economic and industry data, are not available. It would be appropriate, however, for a report written later to incorporate this data (as long as condition 2 above is satisfied.)
  4. Some appraisals are prepared before the valuation date! Financial reporting valuations (such as goodwill impairment tests) are often done a few weeks before fiscal yearend so that the financials can be completed and issued timely. This is OK if these appraisals are labeled “hypothetical” (because they assume / project results from the report date to the valuation date).

Valuations play a part in all tax, transaction, and litigation matters. For additional information or advice on a current one, please do not hesitate to call.

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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations. For more information, visit www.wesresvaluation.com or call (614) 448-3700.

Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please www.wesrespartners.com or call (216) 589-0900.

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