Why Does “Known or Knowable” Matter in Valuation? Reviewed by Momizat on . The Use of Hypotheticals to Illustrate What Is Known or Knowable In valuation, the concept of “known or knowable” refers to events or circumstances that are (or The Use of Hypotheticals to Illustrate What Is Known or Knowable In valuation, the concept of “known or knowable” refers to events or circumstances that are (or Rating: 0
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Why Does “Known or Knowable” Matter in Valuation?

The Use of Hypotheticals to Illustrate What Is Known or Knowable

In valuation, the concept of “known or knowable” refers to events or circumstances that are (or are not) known or able to be known as of a specific date. This concept is important in the valuation process because every valuation is performed as of a particular point in time, which is referred to as the valuation date. Because the valuation process is typically completed after the effective valuation date, there may be events or circumstances that could impact value which take place after the valuation date. This article presents a series of hypotheticals to illustrate what is known or knowable as of the valuation date.

Why Does “Known or Knowable” Matter in Valuation? The Use of Hypotheticals to Illustrate What Is Known or Knowable

In valuation, the concept of “known or knowable” refers to events or circumstances that are (or are not) known or able to be known as of a specific date. This concept is important in the valuation process because every valuation is performed as of a particular point in time, which is referred to as the valuation date. Because the valuation process is typically completed after the effective valuation date, there may be events or circumstances that could impact value which take place after the valuation date. For example, if the valuation date is December 31, 2022, and the valuation report is not completed until March 01, 2023, events or circumstances that occur in that two-month window could impact the subject company’s value. Based on valuation standards, however, the valuation analyst may only consider events and conditions occurring up to and as of the valuation date; not those that take place after the valuation date if they were not known or knowable at that time.

All information utilized in a valuation should be known as of the selected valuation date. This includes the following:

  • Financial information (income statements, balance sheets, cash flow and equity statements, etc.)
  • Projections, forecasts, and budgets
  • Customers and vendors
  • Competitors
  • Products or services
  • Management team or employees
  • Locations
  • Acquisitions
  • Pending litigation
  • Unforeseen events (pandemics, floods, fires, storms, or other damaging events)

Occurrences that take place after the valuation date are known as subsequent events. If a significant subsequent event is discovered that was not known or knowable as of the valuation date, the valuation analyst may (but is not required to) disclose the event for informational purposes only while noting that the event does not affect the determination of value as of the valuation date.

The examples below show how certain known or knowable events as of the valuation date can impact a valuation conclusion:

  • The valuation date is September 30, 2022, and the subject company lost a major customer in October 2022. There was no indication leading up to the valuation date that the customer was going to switch providers. Because the loss of this customer was not known or knowable as of the valuation date, it would not impact the value of the subject company as of September 30, 2022.
    • On the other hand, if the subject company had discussions with the customer prior to the valuation date and expected their business would likely cease in October 2022, this impact may be considered in the September 30, 2022, value.
  • The subject company is being valued as of December 31, 2022. In January 2023, a key employee unexpectedly died. Because this was unforeseen as of the valuation date, it would not have been known or knowable and would not be considered in determining value as of December 31, 2022.
    • What if the key employee had a long history of health issues that were known as of the valuation date and the employee was in the hospital at that time? Although the key employee passed away after the December 31, 2022, valuation date, the pre-existing health issues were known as of the valuation date so it may be appropriate to consider in the valuation even though the employee did not pass away until the following month.
  • The valuation date is June 30, 2019, and the subject company is a dine-in only restaurant. In March 2020, after the valuation date, the restaurant was temporarily closed due to the COVID-19 pandemic. Although this event impacted the restaurant’s operations, it was not known or knowable as of June 30, 2019, and therefore would not be relevant to the value determined as of that date.
    • The same would go for any unforeseen event occurring after the valuation date, such as a fire or storm damaging the restaurant.

As indicated in the above examples, the valuation date is a very important component of the valuation process. Only events or circumstances that were known or knowable as of the valuation date may be considered in a valuation. If an impactful subsequent event occurs, you may want to consider utilizing a later valuation date to appropriately capture the impact of the subsequent event on the subject company’s value.

This article was previously published by Marcum LLP, April 20, 2023, and is republished here by permission.


Ashley DeCress, CPA, ABV, CVA, is Senior Manager in the Advisory Services group. Ms. DeCress began her professional career as a Certified Public Accountant (CPA) and pivoted into a practice concentrated in the areas of business valuation, litigation advisory services, financial reporting, complex damages analysis and modeling, strategic planning, and succession/estate planning.

Ms. DeCress can be contacted at (216) 242-0872 or by e-mail to ashey.decress@macumllp.com.

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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