A fundamental concept that is a core principle in valuations is that value is determined at a specific point in time. It is a function only of facts known and forecasts made at that particular point in time. Value is time specific. Businesses and their operations are constantly in a state of transition as a result of fluctuations in their business and industry, competition, government regulation, product offerings, management strategy, financing arrangements and overall economic conditions. At any point in time all of these factors will bear some impact on the value of a subject company or asset.
Consider the value of BlockBuster Video in 1995 versus 2013 (closed)? Sears in 1985 versus 2018? Sam the Record Man in 1975 versus today? Kodak, Eaton’s, Zellers, BiWay, FutureShop, all once corporations that were profitable and therefore had value, today they no longer exist and have no value. In most cases, the drop in value for these major corporations occurred over a relatively short period of time.
This principle is relevant when considering the value of many different types of assets from a family law perspective and makes the selection of the Date of Separation a very critical decision depending on the nature of the assets involved. One needs only to look at what has gone on with the real estate market over the last few years to see how important of a role that timing can play. Leading up to early 2022, the difference of a month was having a significant impact on the market values of real estate assets and thus on the potential impact to equalization payments. While matrimonial homes tend to get treated differently, the impact from changes in market values for residential rental properties, cottages and vacation properties and commercial real estate was substantial. And now, with the softening of the real estate market, this is also impacting equalization payments, albeit in the opposite direction relative to price escalations experienced for the past 15 to 20 years.
Another example where we have seen significant fluctuations is with cryptocurrency. We have commented more on the market value of cryptocurrency in this article [Reference the details of the article below] but on one day the market value of cryptocurrency can be substantial and the next it has completely crashed.
From a business perspective, the importance of timing generally impacts what information we can and can not consider in completing our determination of fair market value. We recently experienced a family law file where the issue of timing was front and centre and resulted in very wide differences in value between the business valuation experts.
The corporation involved had experienced a significant loss but had returned to profitability in the following year. Near the end of that following year, management had prepared projections that presented expected further growth. The business owner had positioned that the Date of Separation was early on in the year following the loss – before the projections had been prepared while the spouse took the position that the Date of Separation was after the projections had been prepared and near the end of the fiscal year. While the projections were not completely achieved, the subsequent operating results provided support that the projections were reasonable. Thus, given the circumstances, you can see how being able to consider the projections in the valuation could have a significant impact on the fair market value of the corporation.
The last point to consider with respect to timing is the potential impact of hindsight. Quite often we are asked to value corporations using historical valuation dates that can be over 12 to 24 months old. As such, the ability to use hindsight is available given the obvious passage of time. However, the principle of using a valuation date and that value is specific to a point in time, technically requires valuators to ignore hindsight.
While that is the case and the courts have consistently held that hindsight should not be used in determining fair market value, the courts have held that hindsight can be used to:
- Test the validity of assumptions made at the valuation date with respect to future events; and
- Obtain a better understanding of factors or conditions that already existed at the valuation date.