Why Do I Need a Valuation? Selling a Business

(Originally Posted December 18, 2017)

As an owner of a business, chances are you’ve grown quite attached to your company. Perhaps you’ve led the business through some tough years as a startup, or maybe you’ve purchased the business and made it your own. There may have been years of amazing performance and years of disappointing results. Whatever your history is, it is natural for it to be emotionally difficult to part with your business, so it’s important you receive a fair selling price.

How much is your business worth?

Sometimes owners have a rough idea, and other times owners aren’t so sure. Obtaining a valuation from a Chartered Business Valuator is a great starting point for determining value. As valuators, our job is to undertake a bias-free review of your business to help determine a starting point for price negotiations.

Actual Selling Price

The actual selling price of a business can differ from the determined value because valuators typically make a number of assumptions, including:

• The buyer and seller have equal negotiating abilities;
• The buyer and seller are fully aware of all significant information related to the sale;
• There are no legal or contractual restrictions on the sale;
• The timing of the sale is not forced; and
• The business purchase is paid for in cash.

In reality, some or all of these assumptions may not be true. However, determining value is a great starting point for price negotiations.

Determining the Selling Price at Fair Market Value

Determining an appropriate selling price is particularly important if a business is being sold to a related party, such as a family member. The Canada Revenue Agency requires that sales to a related party occur at fair market value. Without a fair selling price, the Canada Revenue Agency will deem the transaction to occur at fair market value (instead of the actual consideration received). The purchaser’s cost will remain at the actual price paid resulting in double taxation.

For example, Sally is selling her business to her son, Bobby. In the process of selling her business, Sally obtained a valuation and determined that the business has a fair market value of $500,000. If Sally wants to give Bobby a deal and only charge him $350,000, Sally will still be required to pay tax based on the value of $500,000. Additionally, Bobby may only receive credit based on a purchase price of $350,000 for tax purposes.

Alternatively, if Bobby wants to compensate Sally extra for the business and pays $600,000, Bobby may miss out on future tax savings when he eventually sells the business, and Sally may still need to pay tax based on the selling price of $600,000. For tax purposes, Bobby will only get credit based on a purchase price of $500,000. To avoid these tax consequences, it’s best to obtain a business valuation and advice from a tax expert.

If you’re thinking of selling your business or you’re planning a future sale, the experts at Davis Martindale would love to work with you.