In an uncertain market, value can fluctuate significantly over time. It’s important to choose the valuation date carefully. Often, the date is prescribed by law or a judge. But sometimes attorneys are allowed to decide between different dates. Here’s a closer look at this fundamental decision.
Estate tax valuations
When valuing assets for estate tax purposes, executors can decide to use the date of death or an alternate valuation that occurs six months later. It usually makes sense to estimate fair market value at both dates — or at least to evaluate whether market conditions have changed materially between the dates.
If an estate chooses the alternate date, it must be used for all assets in the estate. In addition, the IRS may consider sales proceeds to be indicative of fair market value if they’re sold soon after the date of death.
When divvying up a marital estate, state law or a judge may dictate whether it’s appropriate to estimate the value of the practice interests on the filing date, the trial date or an alternative cutoff date that’s based on the end of the company’s fiscal year. In some states, attorneys may request a specific date based on what’s most “fair” to both spouses.
Minority shareholder disputes
In cases involving dissenting or oppressed minority shareholders, the appropriate valuation date is generally the date immediately preceding the wrongdoing that triggered the litigation. But, depending on state law, a party sometimes may argue for a different date.
For example, there might not be sufficient financial data to perform a valuation. Or an unrelated external event may have temporarily increased (or decreased) the practice’s value around the time of the alleged wrongdoing.
The valuation date serves as a cutoff for the information that can be used to estimate value. In general, valuators can’t consider any events that happen after the valuation date, unless the information was “reasonably known or knowable” on the valuation date.
However, there’s a key distinction between events that affect value and those that are indicators of value. A valuator may consider an arm’s-length sale or bona fide third-party offer that occurs within a reasonable time frame as an objective indication of value, as well as intervening facts and circumstances that have drastically changed the value of the business since the valuation date.
Choosing the appropriate valuation date can be just as important as choosing the valuation method. Unfortunately, there’s no universally correct answer. Discuss this issue with your valuator to make sure you’re using the appropriate date based on relevant laws, circumstances and information available.
At H+P, we are dental financial experts. Our industry saturation allows us to provide amazing insight into the valuation and transition of your practice purchase or sale. Call our office today to speak with a dental financial expert!