COVID-19: Valuation Disclosures, Limitations, and Bridging Letters

This is the third blog in Davis Martindale’s “Covid-19 Mini Series”.

In our previous blog, COVID-19: Known or Knowable?, we discussed the use of hindsight in valuation, and whether knowledge of the economic impact of Covid-19 can be incorporated into a value determination. In this blog, we discuss potential Covid-19 disclosures and reporting options that you may see in valuation reports.

Valuation reports are prepared for a wide variety of purposes, and each purpose indicates a specific date of the value determination (the “valuation date”). For example:

• For a matrimonial dispute, the Date of Marriage and/or Date of Separation is likely the valuation date;
• For a business sale or succession planning, the most recent date possible may be the valuation date; and
• For a shareholder oppression remedy, the date of the dispute’s triggering event could be the valuation date.

As the law often dictates the valuation date, valuators and clients do not often have the luxury to choose a convenient valuation date. A particularly inconvenient valuation date is immediately before, during, or following the Covid-19 pandemic, because of the resulting economic uncertainty.

To provide clarity to readers, Chartered Business Valuators can include several types of disclosures in valuation reports.

Subsequent Event Disclosures

Subsequent event disclosures may be included in valuation reports to describe information that was not known or knowable at the valuation date, to assist the readers, whether legal counsel, business owners, or opposing experts, in understanding the context of the valuation at the valuation date and the current date.

A valuation of a restaurant effective December 31, 2019 might reflect a healthy and profitable business, but as additional information for the reader, subsequent event disclosure could indicate the restaurant was shut down and not operational for a period of several months following December 31, 2019, because of the Covid-19 pandemic. This additional disclosure may be helpful to readers in planning legal settlements, or in guiding the process of a live transaction.

Report Assumptions

Valuation reports typically rely on a number of assumptions, which need to be disclosed in the report body or its appendices. Where assumptions are made about financial results or the effect of the Covid-19 pandemic on business operations, these should be clearly set out in the valuation report.

For example, if a manufacturing facility was being valued effective March 31, 2020, the valuation report should include a variety of assumptions about the reasonability of projected financial results, the stability or lack of stability within human resource and supply chain management, and the change in temporary and long-term customer demand.

Scope Limitations

Where a Chartered Business Valuator is unable to obtain the essential information to assess the fair market value and when reasonable assumptions cannot be made, the valuation report may include a disclaimer that describes the limitations of the scope of work and qualifies any conclusion that may be provided.

Continuing with the above manufacturing facility example, if reasonable financial projections cannot be made and it is too difficult to prepare realistic assumptions, then the valuation report may include a disclaimer to that effect. Caution should be used when relying upon a valuation report that includes a disclaimer.

Bridging Documents

When fair market value of a business is determined but then subsequently changes following the valuation date, Chartered Business Valuators can prepare a bridging document that re-values the business at a later date, and/or provides an explanation as to why the fair market value has changed.

For example, a restaurant owner, whose business was valued as vibrant and healthy as at December 31, 2019 but subsequently permanently went out of business, may wish to have a bridging document prepared to express the new value several months later, and/or an explanation as to why the value has changed.

These various types of disclosures are all meant to provide additional insight and clarity to the readers of valuation reports. During times of uncertainty, it is particularly important to pay attention to the disclosures provided in these reports.

If you would like a further discussion on any of the topics covered in our mini series, please do not hesitate to call our team.