Expert business valuation services

A business valuation report will, above all, allow you to have an independently calculated and justified fair market value. Several authorities place particular importance on the independent calculation of fair market value, under pain of penalties or repercussions on the business's activities. Indeed, conflicts may arise in different scenarios:

Tax planning: Tax authorities such as the CRA require a determination of fair market value according to business valuation standards when a non-arm's length transaction exists. 

Buying or selling a business: Often, the seller or business owner will tend to overestimate the value of the business due to the incorporation of sentimental value. The buyer will then require an independent valuation to eliminate this cognitive bias. 

Business financing: Lenders and investors will want to know how the purchase price was determined. If there is a business valuation report justifying the sales or EBITDA multiples, their business risk analysis will be significantly reduced. The likelihood of a business loan will be increased.

Commercial Litigation or litigation support: In the event of a shareholder dispute, share buyback clauses often exist in the shareholders' agreement. This can occur during a divorce or when a shareholder is oppressed. The determination of the fair market value will then have to be made. Our team of Chartered Business Valuators (CBV) can act as expert witness in this context.

Types of reports and process

Business valuation is a qualitative exercise that is not simply based on the application of a formula. The business valuation process involves different steps.

The first step involves assessing the level of valuation assurance required to determine the type of report to be issued. There are three types of business valuation reports. For each of these reports, the business valuator has an obligation to act independently.

1.   The Calculation Valuation Report: The lowest level of assurance and corroboration of financial and economic data. The price for this report is the lowest. This type of report is often issued in tax planning contexts or when there is a limited number of users.

2.   The Estimate Valuation Report: A moderate level of assurance and corroboration of financial and economic data. The price for this report is moderate. This type of report is often issued in potentially litigious contexts or when there is a moderate number of users.

3.   The Comprehensive Valuation Report: The highest level of assurance and corroboration of financial and economic data. The price for this report is the highest. This type of report is often issued in litigious contexts or when there is a large number of users of the report.

Alternatively, there is the advisory report, where fees can be lower depending on the context, and where the business valuator does not need to be independent.

Required documents and information gathering

The second step will be to sign the letter of engagement, detailing our service offer and the responsibilities of each party. We will then need to retrieve the documentation and information required to complete the business valuation. The amount of data and information requested will depend on the type of report issued. Normally, we ask for :

- Financial statements for the last 3 to 5 years;

- Tax returns for the last 3 years;

- A summary of the industry, the history of the business and its strengths and weaknesses;

- A site visit to review internal processes;

- A list of discretionary or non-recurring expenses;

- Management salary and bonus; and

- Targeted financial issues.

If a comprehensive report is issued, we may request more detailed information such as :

- Profit margins by revenue source or products and services;

- Customer and supplier concentration.

We will also conduct economic and industry analyses to determine the risks associated with the business being valued. This will be particularly important in order to apply a capitalization rate to the profit margins or cash flow determined. The capitalization rate then depends on the rate of return, which is determined by the level of risk associated with the business.

Business Valuation Methodology

The third step will be to apply the appropriate valuation method. There are three main methods in business valuation :

1.   The earnings-based approach;

2.   The asset-based approach; and

3.   The market-based approach.

The earnings-based approach will examine historical revenues and expenses to determine the level of recurring margins. Often, this involves calculating adjusted EBITDA to determine recurring levels of cash flow.

Adjusted EBITDA differs from EBITDA on the financial statements. Often, potential buyers simply rely on the net earnings presented in the financial statements, whereas this indicator is not conducive to informed decisions. Indeed, the financial statements of SMEs are often biased by a tax-advantaged financial reporting, where expenses are overstated in order to reduce taxable income. The job of business valuation professionals is to adjust these profits to determine a normalized level representing future and sustainable cash flows.

Subsequently, depending on the growth phase and the type of business, a cash flow projection may have to be made.

We will then apply the most appropriate calculation methodology between :

1.   The capitalization of maintainable earnings;

2.   Capitalization of maintainable EBITDA; or

3.   Discounted cash flow (DCF).

The asset-based approach will be used instead if the value of the company's assets has a higher rate of return or if the nature of the company's operations is based on tangible assets. 

This is the case in particular for holding companies or real estate investment companies. Although these companies may generate income through dividends or management fees, the majority of the enterprise value is based on the market value of the assets held. 

We will therefore work with professionals in the valuation of tangible assets such as real estate or equipment appraisers.

We will then apply the most appropriate calculation methodology between :

1.   The adjusted book value; or

2.   The liquidation value.

The market-based approach will look at companies comparable to the one being valued. Business valuation professionals look at several criteria for comparability, such as :

1.   The size of the company and the number of employees;

2.   Level of revenue;

3.   Implicit enterprise value;

4.   The nature of the operations and activities of the business;

5.   Geographic location of the comparable;

6.   Intellectual property or intangible assets;

7.   Concentration of customers and suppliers;

8.   Private or public company status; and

9.   Other economic factors. 

Our expertise

You now understand our business valuation process. Z&N Valuations is an independent firm of chartered business valuators (CBV). Our experts have unique and rigorous industry experience and in-depth knowledge of various industries and of business valuation in different contexts. Do not hesitate to contact us to let us evaluate your business according to the required standards.

Corporate tax planning

We will determine the fair market value of your company's shares in the event of a rollover, tax reorganization or estate planning.

By justifying the transfer price using appropriate business valuation methodologies, we will avoid potential penalties to the CRA.

Buy, sell and transfer of business

To ensure the sustainability of the business, it is important to start with an assessment of its fair market value. By determining the FMV objectively, it will be easier to attract and negotiate with sellers and buyers.

The business valuation will also help to determine a sensible selling price, which will facilitate the business transfer and succession plan. Since buying a business is a long process, time will have to be optimized. We will help you through the entire process of buying and selling a business.

Shareholder agreement

Upon incorporation, the shareholders of a corporation agree on a unanimous shareholder agreement. Depending on the type of agreement, several instances may lead to a business valuation.

Notably, on the repurchase of shares from minority or majority shareholders, the shotgun clause, the sale of shares or voluntary withdrawal, the corporation will have to determine the fair market value of the shares.

Purchase price allocation

Upon acquisition and on a periodic basis, it will be necessary to allocate the purchase price to the net assets of the business to determine the residual goodwill.

The business valuation will determine the fair market value of goodwill for accounting purposes. Impairment tests will also have to be performed subsequently.

Intangible assets

Intangible assets also hold their fair market value. This should be determined at the time of business turnover or for accounting presentation or goodwill calculation purposes.

Intangible assets can include intellectual property, patents, intangible acquired in a transaction, and more. Even if the physical substance does not exist, the intangible will always have a market value.

Commercial litigation

Our team can also assist you in financial litigation and help you quantify damages. Our experts can act as mediators in order to find alternative settlements.

We also work with specialized law firms with common law courts. Our vast experience will help you in the settlement of disputes.