Why would I need a valuation?

You would be surprised how often you may run into a situation where you need to find out the value of a business.

  • Whenever a business is being bought or sold, both parties need to know whether they are getting a fair deal.
  • If there is a dispute and a business is involved, say a breach of contract, or shareholder dispute, or even matrimonial separation of a business owner, independent experts are needed to determine the value of the business to be able to settle the dispute.
  • The government will often want to see expert business valuations to compensate you for an expropriation or to allow you to take advantage of corporate tax planning strategies.

If you find yourself in one of these situations, you can contact one of our Chartered Business Valuators to get more information.

How are businesses valued?

“Value” is what a business is actually worth, while “price” is what ends up being paid. These may not always be the same because once a business is exposed for sale in the market, sometimes the transacting parties are not fully informed, or sometimes they may be under other pressures, or sometimes they are not at arm’s length, and often the payment includes non-cash consideration.

There are different approaches to valuing a business, and the nature of the business dictates the most appropriate approach. We use the following 3 main approaches:

  • Asset Approach- Based on the value of the business’ net assets
  • Income Approach- Based on historical or forecasted earnings
  • Market Approach- Based on sales of comparable companies

What Impacts Value?

Many factors – internal and external- can impact a business.

External Factors:

  • Industry is succeeding or declining
  • Expanding or declining market
  • Barriers to entry (i.e.: necessary cash flow, specialized skills, etc…)

Internal Factors

  • State of financial records
  • Cross-trained employees
  • Stable recurring revenues
  • Succession plans

How has COVID-19 impacted business valuations?

In 2020 we have 3 key observations as to how the pandemic has impacted values of businesses:

  • Timing- constantly changing environment can move values up and down regularly
  • Sector specific- not every industry has been hurt, some are stable or even thriving
  • Access to buyers- fewer investors and lenders are willing to risk investment

Business values are mainly driven by cashflows and risk. While cash flows are typically easy, the global pandemic has challenged that. There is a lot of uncertainty which means taking a multi scenario approach to valuations. This allows for more realistic outcomes. Unfortunately with risk, there is no set scenario and it needs to be evaluated on a case by case basis.

For more information on business valuations we invite you to watch the full webinar “Business Valuations 101” with Omar Chaudry and Michael Nazarevich. If you have further questions, please email marketing@rlb.ca