Last week on the IBA blog Rand Curtiss (Loveman-Curtiss Inc.) wrote that one of the most frequent questions he gets from business professionals is “how long does a valuation last?” His summarized answer is: “Valuations last as long as there are no material changes in their underlying assumptions and the implied value conclusion.” Curtiss also provides a definition of “a material change:”
“A material change” has to be big enough (and sustainable) to affect the value conclusion significantly. For example, if we are valuing a business as of December 31, 2010 and using an equity discount rate build-up, the 20-year Treasury bond yield on the valuation date was 4.1%. One week later, it rose to 4.2%. If nothing else had changed regarding the business or its financial position in that short period of time, the increase in the discount rate of 0.1% (which I round off to the nearest percentage point anyhow) would have no effect on my value conclusion, and I would conclude the same one as of one week later. If the rate had risen a full point (which is rare) in that period, I would at least check to see if that made a big enough difference in the value conclusion to merit a change (if a revaluation was actually necessary).”
Read the rest of Curtiss’ article for a discussion of what could change a value conclusion.
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