Certified Valuation Analyst (CVA) Practice Exam

What event in the 1920s necessitated the need for valuations of closely held businesses?

1. The Great Depression

2. Prohibition

3. The Stock Market Crash

4. World War I

The correct answer is: Prohibition

The 1920s marked a period of significant economic change in the United States, with the emergence of closely held businesses becoming more prominent due to various social and legal shifts. Prohibition, which started in 1920, played a crucial role in altering business practices and creating a unique landscape for alcohol-related enterprises. During Prohibition, many businesses that were previously legitimate were forced underground, leading to the establishment of numerous illegal operations. This dramatic shift in the business environment necessitated the valuation of these closely held businesses not just for potential taxation and legal compliance but also for determining the worth of these enterprises in a volatile market. As businesses operated outside the law, there was a growing need for accurate valuations to guide investments, mergers, acquisitions, and even the potential for legalization efforts after Prohibition ended. Valuations during this period had to account for the unique risks and opportunities presented by the illegal market, making it essential for business owners and stakeholders to understand their worth amidst changing regulations. The events leading to the Great Depression, the Stock Market Crash, and the aftermath of World War I contributed to the economic context of the time but were not the direct catalysts for the specific need for valuations of closely held businesses in the 1920s as Prohibition