The purpose of a business valuation is to estimate the value of a business enterprise, or an equity interest therein. It includes estimating the value of associated intangible assets (i.e., assets that are not physical in nature, such as intellectual, customer, human, and social capital and goodwill), and which often account for most of the value.
“Fair market value” is the most common definition applied to value a business. It is defined as:
“the highest price available in an open and unrestricted market between informed and prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash.”
Fair market value may differ from the price that could be realized if a business was sold. A business may sell for more, or less, than its fair market value for reasons such as differing negotiating strengths of the parties involved, unequal motivation to close the deal, and purchase consideration being other than cash.
Business valuations are most frequently needed by private companies, as their shares are not traded on a public exchange. However, business valuations are also used by public companies for such things as fairness opinions in the context of a “going private” transaction, purchase price allocations for acquisitions, and intangible asset and goodwill impairment testing for financial reporting purposes.
There are a variety of reasons for preparing a business valuation. Shareholder agreements often have buy/sell provisions for transactions among shareholders. These provisions may require a periodic valuation of the company, or a valuation at the time that a transaction is contemplated. Business valuations may also be used to plan for and negotiate a management buy-out, freeze the value of the shares for tax planning purposes, divide the value of matrimonial assets, or resolve shareholder disputes. In matrimonial and shareholder disputes cases, business valuations are used for expert witness testimony in court.
- There are three commonly used business valuation approaches, including:
- Earnings / cash flow approaches that are appropriate when the business is a viable going concern;
- Asset based approaches that are appropriate for holding companies and those with an uncertain going concern outlook; and
Market approaches that are appropriate when there are relevant comparable transactions for similar businesses, the business itself, or the individual assets.
Within each approach, there are several different methodologies available, as no single valuation method, rate of return, income tax, business analysis, or other guidelines can be said to apply in every circumstance. The valuator must exercise professional judgment in selecting and applying the available valuation methods to a particular case, as each method has its advantages and drawbacks.
About XPS Group
XPS Group prepares business valuations in accordance with the standards of the Canadian Institute of Chartered Business Valuators (https://cicbv.ca/). Our professionals have extensive experience in business valuations and related services for a broad range of industries, developed from over 400 engagements during the past 15 years. Engagements have included business and share valuations, purchase price allocations, intangible asset and goodwill impairment tests, fairness opinions, quantifications of financial losses, pricing analyses to sell a business, marketing businesses for sale, negotiating purchase and sale transactions, assisting with management buy-outs, managing the transaction process, preparing presentations, assisting to raise debt and equity, buy-side due diligence, and preparing business plans. We have also been called upon on several occasions to provide expert witness testimony to the Supreme Court of British Columbia for business valuations and the quantification of financial losses