How do I get a business valuation before selling?

A valuation is something an owner commissions, not something looked up. The decisions that matter are who prepares it, how detailed it should be and what the owner hands over. Those choices shape the result more than the method does, because a report is only as sound as the records behind it and only as useful as its stated purpose.

Choosing who prepares it

The Business Development Bank of Canada (BDC) says it can be helpful to hire a business valuator to give a realistic picture of what a business is worth. CBV Institute’s site has a Find a CBV page, and one of its news items describes the experts behind fair value conclusions as typically CBVs. Useful questions for any candidate are which level of report they would prepare for your purpose and what they will need from you.

Choosing the level of report

BDC describes three report types, from basic to thorough. A calculation is a brief report after a minimal review, with little or no corroboration of information. An estimate is moderately detailed and rests on limited review, analysis and corroboration. A comprehensive report is highly detailed and rests on a corroborated review. The more thorough the report, the greater the cost and the assurance. Whether a formal report is needed at all depends on how the number will be used.

Records the valuator asks for

BDC says a valuator typically reviews records such as these:

• financial statements
• the prior-year tax return
• discretionary and non-recurring expenses
• management compensation
• a list of employees

What a valuation does not settle

The valuator chooses an earnings-based, market-based or asset-based method, or a combination, depending on the business and the information available. BDC cautions that fair market value is not necessarily the price a business will sell for, because market conditions, the buyer’s interests, due diligence, financing and the seller’s eagerness all move the final figure. A valuation of the whole business is also not a price allocation. The CRA notes that a sales agreement may set a price for each asset, and the federal small business loan program’s guidelines say an appraisal value will not be accepted as the allocation among the assets of a going-concern purchase.