Hindsight Part 1 – General Exclusions
The Fine Art of Retrospect – General Exclusions
Part 1 in our Hindsight series discusses how hindsight can affect your business valuation. What happens if events occurring after the valuation date have an impact on the value of a business?
We all know that hindsight is 20/20, but how can this affect your business valuation? What happens if events occurring after the valuation date have an impact on the value of a business?
It’s well established in Canadian law that the value of a business is to be determined at a specific date (known as the “valuation date”). To determine value at the valuation date, a Chartered Business Valuator is usually only permitted to consider knowledge available at that specific date. But what happens if a major event occurred after the valuation date that would significantly change the value of the business? The use of this information is referred to as “hindsight,” and the courts have generally considered that using hindsight knowledge to determine the value of a business is not permissible.
In a 2013 case between husband and wife Karry and Sandra Jackson (Jackson v. Jackson, 2013 ONSC 7884), the couple became separated in 2010. At the time of separation (the valuation date), Sandra had debt of over $110,000. Over two years later, she entered into a consumer proposal and the debt was reduced to $27,000.
The issue was whether Sandra’s property at separation should include debt of $110,000 or of $27,000. The Court decided that the full amount of debt of $110,000 should be considered, because the consumer proposal and its results occurred after the valuation date. Using knowledge of the consumer proposal results would have been a use of hindsight.
Likewise, in a 2016 case between wife and husband Toni and Martin Halliwell (Halliwell v. Halliwell 2016 ONSC 182), the Court needed to consider whether hindsight was permissible. The couple separated and the value of one of the husband’s companies needed to be determined as at June 2009 (the valuation date). At that time, the company had not yet received payment for a large project that was completed in 2008. By the valuation date, the company had entered into litigation against this customer to recover payment, which was eventually settled in 2013.
The issue was whether the valuation of the business as at June 2009 should consider the legal settlement in 2013. The Court decided that the legal settlement should not be considered, because knowledge of the settlement results was not available at the valuation date. Considering the legal settlement would have been a use of hindsight knowledge.
In both of the above cases, the Courts did not allow the use of hindsight knowledge. This has been the general position of the Courts in Canada.
If you’re involved in litigation and wondering whether your value determination can use hindsight knowledge, give the experts at Davis Martindale a call.
You might also be interested in reading Part 2 in our Hindsight Series – Exceptions to the Rule.