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Business valuations
A longer explanation than most sites give. This covers what a valuation measures, the three levels of report, the approaches used, and the situations where the work belongs with a Chartered Business Valuator rather than an accountant.
A valuation is an opinion on what something is worth at a particular date, built from a combination of measurement and judgment. The measurement part is arithmetic. The judgment part is where the value comes from, and it is why two sophisticated people can look at the same business and reach different numbers without either being wrong.
Four principles shape almost everything that follows.
Value is forward looking. A buyer is purchasing future cash flows, not past ones. Historical results matter only to the extent they tell you something reliable about what is coming. This is the point accountants find hardest, because our training points the other way, at reporting what happened.
Value is fixed at a date. A valuation reflects what was known or knowable on the valuation date and nothing after it. A valuation dated January 2020 does not contemplate the pandemic. Choosing the date is therefore a substantive decision rather than an administrative one, and it is sometimes dictated by an agreement, a statute or a court rather than by preference.
Cash flow drives value, not assets. Except where a business is worth more wound up than continued, in which case liquidation values govern.
Value requires transferability. Something only has commercial worth if it can be sold. This is why personal goodwill is such a live issue in small businesses, and why non-competition and non-solicitation agreements exist: they convert something personal into something transferable.
Most valuations are what the profession calls notional, meaning there is no actual transaction and no real buyer. A hypothetical purchaser is constructed and the analysis proceeds from there. That is a different exercise from pricing a live deal, where negotiation, motivation, financing and the sale process itself drive the outcome.
Common triggers:
A valuation engagement is defined before it begins, and the answers change the entire exercise.
These get used interchangeably in conversation and they mean different things, with real money attached.
Fair market value contemplates a hypothetical arm's length transaction, and it takes account of discounts. A minority shareholding is generally worth less than its arithmetic share of the whole, because the holder cannot control distributions or a sale. An interest that is hard to sell is worth less than one that is liquid.
Fair value, in the context of shareholder remedies under the corporations statutes, does not apply those discounts. Courts have generally treated it as a pro rata share of en bloc value, on the reasoning that a minority shareholder being bought out under an oppression remedy should not be penalized for the position they were forced into. The term also appears in financial reporting with a different meaning again.
So the same 20% shareholding can be worth materially different amounts depending on which definition governs, and which governs is a question of the agreement, the statute or the case law rather than of valuation theory.
The first document to find is the shareholders' agreement. Before any valuation work, check whether one exists and was actually executed, since drafts that were never signed are common. If it exists, it may specify the triggering events, the valuation date, a formula or process, who appoints the valuator, whether discounts apply, and who pays. A well-drafted agreement answers most of the questions above, and the parties are bound by it unless they all agree otherwise.
The CBV Institute's standards describe three levels, distinguished by how much review, analysis and independent corroboration sits behind the conclusion. The parallel with assurance engagements is useful but imperfect, since all three produce a positive conclusion on value.
| Level | Review and analysis | Corroboration | Typically used when |
|---|---|---|---|
| Calculation | Minimal | Little or none | Preliminary work, internal planning, low dollar amounts, low likelihood of challenge |
| Estimate | Limited | Limited | Some prospect of the number being questioned, but cost needs containing |
| Comprehensive | Extensive, considering all information that could significantly affect the conclusion | Significant independent verification | Litigation, securities matters, large amounts, heavy scrutiny expected |
The level is chosen against the use, not the size of the business. Factors include how much the user will rely on it, how contentious the matter is, how many people will read it, whether it becomes public, and what any governing agreement or legislation requires.
A properly done valuation uses more than one and triangulates between them. Relying on a single method and a single answer is a warning sign.
| Adjusted net asset | Restate the balance sheet to current values on a going concern basis. Used where a business is not generating a return above its net assets, or is not income producing |
| Liquidation, orderly | Assets sold over a normal marketing period, net of the costs of getting there: severance, lease breakage, professional fees, taxes |
| Liquidation, forced | A compressed sale under compulsion. Rarely the right assumption, and usually produces the lowest number, which is why it needs justifying rather than defaulting to |
The most common approach for an operating business. Three components, all of which have to be internally consistent.
Capitalized methods apply a rate to a single representative year, and suit a stable business. Discounted methods project cash flows period by period, and suit a business that is growing, cyclical, or has a finite life. The difference between a capitalization rate and a discount rate is long term growth: the discount rate excludes it because growth is already in the projections.
Comparable public companies, comparable transactions, and previous offers or transactions in the subject company's own shares. Useful as a reasonability check even where the primary conclusion comes from cash flows.
The difficulty is comparability. Public company multiples reflect liquid minority interests in businesses of a different size and risk profile. Private transaction data is thin, often stale, and rarely discloses the terms that drove the price, such as earn-outs, vendor take backs or differing bargaining positions.
On rules of thumb and industry multiples. "Businesses like yours sell for four times" is a conversation starter rather than a valuation. Rules of thumb can be useful as a sanity check where they genuinely derive from real transactions, but they are frequently out of date, drawn from businesses that are not comparable, and stripped of the deal terms that explained the number. Reliable multiple data sits behind expensive subscriptions, and even then requires judgment to apply. Treat any multiple quoted without a source and a date as anecdote.
Historical results have to be adjusted to reflect what the business would earn under normal, arm's length ownership. For private companies this is substantial. Common adjustments:
Assets not required to generate the operating cash flows are valued separately and added, rather than being captured by capitalizing earnings. Typical examples: surplus cash, marketable securities, working capital above the level the business needs, real estate held but not used at its highest and best use, vehicles driven by family members, unused equipment, and under-exploited intangibles.
Care is needed in both directions. Cash that looks surplus may be required by a loan covenant or by seasonality. And negative redundancies exist too: a buyer inheriting a business with working capital below normal, or with deferred maintenance, will price in what they have to put back.
The CBV Institute, the Canadian Institute of Chartered Business Valuators, sets the practice standards used in Canada, and the CBV designation is the only valuation designation in the country. It requires several years of specialized study and experience beyond a professional accounting designation.
Valuation is not a restricted activity in Canada, so a CPA is not prohibited from preparing one. That is not the same as it being a good idea.
A CBV is required, or effectively required, where:
Where a CPA can reasonably assist:
What I will tell you. If your situation belongs with a CBV, I will say so at the first conversation rather than after taking the engagement. Where the work is within the low risk category above, I will still generally want a valuator consulted, because they do this every day and I do not. And where you need one, being helped to prepare properly for it will reduce what it costs you.
Worth knowing whether you are commissioning one or reading one somebody else prepared.
Where a related or close-knit group collectively controls a company, the CRA's stated position is broadly that the group will act to maximize mutual wealth, so minority positions within it should be valued pro rata without a minority discount. In practice families do not always behave that way, and the courts have continued to treat minority and marketability considerations as relevant. It is a rebuttable position rather than a rule, and it turns on the facts.
If the matter is heading to court, an arbitration or a contested negotiation, or if independence is required, you want a Chartered Business Valuator. For a straightforward tax reorganization done well in advance of any sale, a CPA can often assist, ideally with a valuator consulted. The honest test is what happens if the number is challenged and by whom.
The extent of review, analysis and independent corroboration behind the conclusion, and therefore the cost. A calculation involves minimal review and little corroboration. An estimate involves limited review and limited corroboration. A comprehensive report involves extensive analysis and significant independent verification, and is used where heavy scrutiny is expected.
There is no reliable free answer, and a figure quoted without a source and a date is anecdote rather than data. Credible multiple information sits behind paid databases and still requires judgment to apply to a specific business, since size, customer concentration, management depth and asset intensity all move the number. Anyone quoting a multiple confidently without asking about those things is guessing.
Start with the agreement itself, and confirm it was actually executed rather than drafted and left unsigned. It may set the triggering events, the valuation date, a formula or process, who appoints the valuator, whether discounts apply and who pays. Those terms bind the parties unless all of them agree otherwise, and they answer most of the questions a valuator would otherwise have to ask.
Under fair market value, because the holder cannot control distributions, remuneration or a sale, and because the interest is harder to sell. Under the fair value standard used in shareholder remedies, those discounts are generally not applied. Which standard governs depends on the agreement, the statute or the case law rather than on valuation theory.
Well before a sale is contemplated. Valuations supporting a freeze or a reorganization are treated as lower risk when they are clearly not prepared in anticipation of an imminent transaction, and the planning itself works better with time. A valuation produced weeks before an offer invites a different kind of scrutiny.
This page is a general explanation as at August 2026 and is not advice, a valuation, or an opinion on value in any particular case. Valuation practice standards are set by the CBV Institute, and requirements differ by purpose, by governing agreement and by legislation. Where a matter is contentious or before a tribunal, obtain a Chartered Business Valuator.
That determines everything else, including whether you need a valuator rather than an accountant. Twenty minutes, no charge.
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