Hindsight in Business Valuation

June 2018

Value is determined at a specific date and is a function of facts that existed and events anticipated (or forecasted) as of a point in time. Given factual evidence from subsequent events that occurred would not have been available to a willing buyer and willing seller at the effective valuation date, it is held what would or would have reasonably been anticipated vis-à-vis the future, which is assumed by the parties at the time. Typically, hindsight is not available in reaching a valuation conclusion in notional market transactions, e.g., in fair market value determinations for income tax purposes.

However, the use of hindsight and the degree to which it is admissible for valuation purposes has been considered by the courts in a number of valuation cases; the admissibility for valuation purposes has arisen in three broad areas:
a. Taxation;
b. Expropriation; and
c. Shareholder appraisal rights.

Even though retrospective evidence is inadmissible in reaching valuation conclusions in the notional market, it has been allowed by the courts to test (or confirm) the reasonableness of assumptions or projections made in arriving at value as of the effective valuation date.

The United States Supreme Court stated in Ithaca Trust Co. vs. U.S. that “the value of property at a given time, like all values, as the word is used by the law, depends largely on more or less certain prophecies of the future; and the value is no less real at that time if later the prophecy turns out to be false than when it comes out true”.

In the J.A. Carruthers v. The Queen, facts subsequent to a 1971 valuation date were admitted by the Federal Court – Trial Division, in order to test an assumption. The court stated that “the validity of this conclusion, which would be reasonable to make as of (the valuation date) can be verified by the fact that (Mr. Carruthers) did in fact leave the company in 1975 following the sale of his shares…in 1975.”

Justice Mahoney, in National System of Baking of Alberta Ltd., had previously rejected the validity of hindsight as probative of fair market value at a given date and took nothing that occurred after the Valuation date into account. Soon after, in Connor v. The Queen, Justice Mahoney stated that “the reasonableness of projected earnings may be measure against the yardstick of actual results without arriving at those projections by application of hindsight”.

At Minerva Valuation Advisors, we are trained, as business valuators, appraisers, bankers and financial analysts, in a variety of settings including in tax planning valuations, family law valuations, shareholder disputes valuations and merger & acquisitions valuations and advisory.

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