Business valuation explained (Canada)
Valuation is an informed opinion of what a buyer might pay, not a single correct number - and fair market value is not necessarily the final selling price. This page explains how professional valuators work in Canada, the three main methods, and what moves a price. General guidance only.
Why get a valuation before you sell
Knowing what your company is worth puts you in a better negotiating position and sets reasonable expectations. A valuation report is also useful in family successions, management buyouts, and later dealings with tax authorities. Source: BDC: How to sell your business
The three steps a valuator takes
1. Decide the level of valuation - Canadian valuators can prepare three types of reports, from basic to highly detailed; more thorough costs more but gives more assurance. 2. Gather and analyze information (financials, operations, compensation, staff lists and more). 3. Apply the appropriate valuation method or combination of methods. Source: BDC: How to sell your business
The three main methods
Earnings-based - value from past results and forecast cash flow or earnings; common for profitable businesses worth more than their net assets. Market-based - a multiple of metrics such as EBITDA; the multiple varies greatly by industry and market conditions. Asset-based - assets minus liabilities; typical where value is asset-related (for example real estate). Source: BDC: How to sell your business
What moves the final price
Fair market value is not the guaranteed sale price. Market conditions, the buyer's strategic interest, due diligence findings, financing availability, your eagerness to sell and your post-sale involvement all move the number - BDC notes a strategic buyer is often willing to pay more because they see synergies, while a 100%-cash-out deal shifts risk to the buyer and can reduce the valuation. Source: BDC: How to sell your business