5.1 Hindsight in valuators’ reports?
If only I knew then what I know now – it is often said that “hindsight is 20/20.”
Both the CICBV and the courts in general do not allow the use of hindsight in valuators’ reports. Such reports usually have a fixed valuation date; one of the skills required of a CBV is to position himself or herself back at the valuation date and disregard any events or developments that have taken place between the valuation date and the report date. In an unchanging environment this is not a major challenge. The challenge arises when the internal or external climate of the business being valued changes after the valuation date and the risk of “hindsight bias” creeps in.
The default position is that hindsight may not be used in business valuators’ reports.
Imagine a CBV is engaged in July 2015 to value an Alberta based manufacturing company with a valuation date of March 31, 2015. In a provincial election on May 5, 2015, the left leaning Alberta New Democratic Party gained 50 seats (from its previous 4) to beat the long-standing business-friendly Progressive Conservatives, who had held power since 1971. Unexpectedly, Alberta now had a government that was promising to raise corporate taxes and increase the minimum wage, both of which issues could potentially lower the value of any profitable company with many employees.
In keeping with the no-hindsight principle, the CBV would need to disregard the possible impact of higher wages and taxes on the valuation of the company at March 31, 2015, at which time the possibility of an NDP government in Alberta was considered remote.
In some circumstances, subsequent events that corroborate the CBV’s conclusion of value may be admitted as supporting evidence. However, using those subsequent events to derive the value at the earlier date would not be permitted.
Contact MVI for a more complete understanding of why hindsight is not permitted.