Final Valuation: Prior to Closing, there should be a ‘final valuation as at an adjustment date’ scheduled for a date just prior to the closing. In order to allow time for diligence and the preparation of closing documents, time will be scheduled between the Offer date and the Closing date, during which time the business will continue to operate and bring changes to the valuation with virtually every transaction. The final valuation is meant to capture those changes.
The Offer to Purchase should provide that the Sale Price will be subjected to final valuation as at ‘Adjustment Date’ and provide that final valuation be calculated on the same formula that calculated the Sale Price as at the Offer to Purchase, particularly as it pertains to Balance Sheet Value.
Assuming that the business is a going concern and that it will continue to conduct business as usual up from the time of the Initial Valuation until the Offer to Purchase, and until the Close of Sale (and beyond obviously), then, revenues generated, costs and expenses incurred and earnings or losses accruing to balance sheet as result of the on-going business, will, with every transaction, alter the balance sheet component of the valuation and of the Sale Price.
We have suggested earlier that the business-selling process begin with an initial valuation based on latest and most complete financials available at the time. We also suggest that the valuation and the profile presentations be kept current by updating the valuation on a monthly or quarterly basis thereafter, until the business is sold.
Offer to Purchase: The valuation and profile should be updated to the most recent month-end preceding the Offer to Purchase, and that valuation should provide the Sale Price offered.
Adjustment Date: Then, the valuation and profile should be updated as at Adjustment Date. Between the Offer to Purchase and Adjustment Date, while the valuation may be updated once or twice for diligence purposes, re-valuation will usually not impact goodwill value materially since goodwill valuation is typically based on an average of earnings calculated over a period of years, and adding and averaging one or two months more into the mix will usually have little or no impact.
However, that is not the case with Balance Sheet Value, which is directly calculable on ‘the day of valuation.’ The balance sheet will be directly impacted by continuing business on a daily basis. That impact will be calculated in the ‘Adjustment Date valuation’ and the Closing Sale Price should be adjusted by the net difference between Offer to Purchase and Adjustment Date balance sheets. And, just as in the Initial Valuation, Sale Price in the final valuation will continue to be the sum of ‘Goodwill Value plus Balance Sheet Value.’
Of course, if something was to occur between the Offer to Purchase and Adjustment Date, that did materially impact Goodwill Value, updated valuations (and due-diligence) would expose the impact and provide opportunity to deal with it.
Adjustment Date, will typically be scheduled as the last day of the month prior to the Closing Date, and will ‘effectively’ become the last business date under the seller’s ownership. Of course the business will not actually change hands until the sale closes at Closing Date, but closing documents will effect the change to be as at Adjustment Date.