Do Business Valuations Have An Expiry Date?
Business valuations are an important tool used to determine the value of a business. They are typically conducted when a company is being sold, when new investors are being sought, or when an estate plan is being developed. However, many people wonder if business valuations have an expiry date, and if so, how long they remain valid.
A business valuation forms the basis for decision-making in various contexts such as in a business sale, or in a merger or acquisition, and others. It also serves as the foundation of planning in strategic, managerial, and operational aspects of a business.
Therefore, it is important to ask the following question.
Does a business valuation have an expiry date?
The answer to whether business valuations have an expiry date is not a straightforward one. In general, a business valuation is only valid for a certain period of time, as market conditions and other factors can change over time. However, the length of time that a valuation remains valid depends on several factors, including the purpose of the valuation and the specific circumstances of the business.
For example, if a valuation is conducted for the purpose of obtaining financing, it may only be valid for a short period of time, such as six months to a year. This is because market conditions can change rapidly, and lenders will want to ensure that the valuation reflects current market conditions. Similarly, if a valuation is conducted for the purpose of selling a business, it may only be valid for a short period of time, such as six months to a year, as the market for a particular type of business can change quickly.
On the other hand, if a valuation is conducted for the purpose of estate planning, it may remain valid for a longer period of time, as the value of the business may not change significantly over a period of several years. Similarly, if a valuation is conducted for the purpose of tax planning, it may remain valid for a longer period of time, as tax laws and regulations tend to change more slowly than market conditions.
What is Our Opinion?
In our opinion, yes they absolutely do. There are several factors that come into play regarding how long a business valuation is valid for.
Anytime a business valuer conducts a valuation of a business, they utilise data that is dated prior to the valuation date. For example in a public listed or a multinational company, there are several aspects which fluctuate from day to day such as stock prices and foreign exchange rates.
The valuation figure will be influenced by the effects of certain rates (like equity risk premium) going on that day. That is why the total value of such businesses will not be identical on two different days. Similarly for a private company, there are several aspects which are just a yearlong engagement that changes from time to time that affects valuation.
These aspects can exist in the form of depreciation, market conditions, raw material costs, consumer trends, etc. The purpose for undertaking a business valuation is crucial in determining valuation processes, which will ultimately determine the valuation and validity of it.
The company’s performance, current market conditions and the current industry standards needs to be reflected when the business valuation is regularly updated.
It is important to note that even if a business valuation remains valid, it may need to be updated periodically to reflect changes in the business or in the market. For example, if a business experiences significant growth or acquires new assets, the valuation may need to be updated to reflect these changes.
Every valuation report contains assumptions that are subjective in nature and they are established on a preset ‘validity period’. All assumptions used in a valuation are subject to inevitable and constant market changes.
Other factors that affect business valuation validity include:
- control percentage change
- management overhaul
- revenue stream changes
- political and legal changes
- purpose of performing the valuation
- economic condition changes
In most cases, we assert that a business valuation has an expiry date, and would be valid for no longer than 12 months.
Conclusion
In conclusion, while business valuations do not have a specific expiry date, their validity is generally limited to a certain period of time, depending on the purpose of the valuation and the specific circumstances of the business. It is important to work with a qualified professional to determine the appropriate timing for conducting a business valuation, and to update the valuation periodically to reflect changes in the business or in the market.
Speak with a Qualified and Experienced Business Valuer. Read here to find out how to prepare a business for business valuation.
