When do I need a formal business valuation?

A formal business valuation is a written opinion of value from a qualified valuator, such as a chartered business valuator (CBV). The sources below describe occasions when one helps or is called for, not a rule that every owner must have one. The need comes from what the number will be used for, and by whom. If a buyer, a lender, a court or the tax authority will rely on it, ask what standard of report they expect.

Buying, selling or changing owners

The CBV Institute lists buying, selling or merging a business, and bringing in or buying out an owner, as occasions to engage a CBV. It says that before you go to market, or make or accept an offer, you need a defensible valuation. BDC notes that owners often hold a different value in mind than buyers, family successors, financial partners or tax assessors, and that a chartered business valuator can help you judge whether a buyer’s offer is reasonable.

Family transfers and estate planning

A gift or sale inside the family does not remove the question. BDC says that even if you are giving the company to a family member, you may require a third-party valuation to ease conflict, plan your estate and optimize tax treatment. Ask your accountant and lawyer whether the transfer you have in mind calls for one.

Disputes and shareholder rights

The CBV Institute includes disputes over the value of a business or its shares among its occasions. One example in law: under section 190 of the Canada Business Corporations Act, a shareholder may dissent from certain listed resolutions, such as selling, leasing or exchanging all or substantially all the corporation’s property. Subject to subsection 190(26), which bars payment where there are reasonable grounds to believe the corporation could not then pay its liabilities, a shareholder who complies with the section is entitled to be paid the fair value of the shares. If the corporation makes no offer, or the shareholder does not accept it, the corporation may apply to a court to fix a fair value, and the court may in its discretion appoint appraisers. Provincially incorporated companies are governed by their own province’s corporate statute.

Tax and financial reporting

The CBV Institute says tax events call for a supportable value and that acquisitions and corporate year-ends often trigger valuation requirements under accounting standards. In the Income Tax Act, subsection 69(1) begins with “Except as expressly otherwise provided”. Paragraph (a) then says that where a taxpayer acquired something from a person not dealing at arm’s length, at an amount above fair market value, the taxpayer is deemed to have acquired it at fair market value. Your accountant can say whether a rule like this applies to you. For the selling-side steps, see getting a valuation before selling.