A business valuation is the determination of the value or worth of a business enterprise.
Why is a business valuation required?
A business valuation may be required for a proposed sale of a business enterprise. Also, a business valuation may be required in situations where there is no actual transaction (referred to as a ‘notional’ valuation). These situations include estate planning, income tax requirements (such as a death of a shareholder), corporate reorganizations, partner or shareholder disputes, management buy-outs, commercial disputes, marital disputes and expropriations.
Who is the subject of a business valuation?
The business or company is typically the subject of the valuation. However, the value of a particular owner’s interest in this business is usually the focus. The level of involvement of the owner(s) in the business operations may affect the business value. Also, the value of a non-controlling interest in a business may be less than its proportionate share of the overall business value due to the inability of the non-controlling owner to control the decision-making of the business.
Where does value come from?
For most businesses, the value comes from the earnings that the business can generate. The value is calculated by multiplying the earnings by an earnings factor. For some other businesses, such as holding companies, the value comes from its assets owned (i.e. real estate, investments, etc).
What types of valuation reports are there?
Under the Standards of the Canadian Institute of Chartered Business Valuators, there are three types of valuation reports: a) comprehensive; b) estimate; and c) calculation. The conclusions reported therein differ by the level of assurance provided and the extent of analysis, investigation and corroboration performed by the business valuator, with a comprehensive valuation report providing the highest level of assurance and the calculation valuation report providing the lowest.
When is a valuation effective?
One of the primary business valuation principles is that the business valuation is at a point in time. The value conclusion is not static and is affected by many factors, both internal and external to the business, including the general economy, the particular industry, the earnings power of the business enterprise, the management team, the availability and access to capital, etc. The length of time that a value conclusion remains relevant is dependent on the degree to which the particular business enterprise is affected by the internal and external factors.
By Douglas Craig, CPA, CA, CBV
Doug is the President of Fazzari Valuations Inc., which is the valuations division of Fazzari + Partners LLP, Chartered Professional Accountants.