At the beginning of the year, there are always a number of NFL 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.
The same is true when it comes to valuing companies. Oftentimes, people have a misconception that the values of privately held businesses stay relatively constant, absent regular transactions in their equity. 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 plays an important role in the final determination of a company’s value.
For instance, consider the value of a start-up company with no operating history and in its formative stages. The company may have little to no value at this point because the likelihood of it becoming 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 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 1990s to the powerhouse of the 2000s.
The passage of time answers many questions both in the world of football and the world of valuation. Valuation analysts applying professional standards can only consider facts that are “known or knowable” as of the valuation date, in reaching a conclusion of value. For example, 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. Future events, however, can later provide a “reasonableness check” for management’s original estimates and projections on the valuation date.
Just as the date on which you pick the projected Super Bowl champion plays a significant role in the team you 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 understand and appreciate.
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