In today’s dynamic business landscape, amongst dropping interest rates, fluctuating stock markets, increasingly complex regulatory challenges, fears of a recession stemming from softening consumer spending and fierce competition in almost every sector, there is one important question that every business owner needs to ask:

“What is the worth of my business in the market?”

Whether you’re considering a merger, acquisition, succession planning, raising or borrowing funds, preparing financials or simply want to understand your company’s worth, a precise valuation can provide valuable insights, and paint a picture of where your business stands in the market relative to others. It can act as a reality check for business owners, providing an unbiased opinion on where their business stands and if it can survive in the market.

In a series of articles, we will explore why this is such an important question and talk about the various aspects that need to be considered in the process.

But how do you define value?

In its essence, a valuation is the process of determining the ‘economic worth’ of your business taking into considerations various factors such as your business model, historical performance, availability of capital, investment in growth, market positioning and other external factors. Valuations, therefore, are a hybrid of art and science.

There is then also the consideration of Price vs Value. While they may seem to be similar at first glance, price and value are different in that value is more subjective and can differ significantly based on the person, time and purpose, whereas price, in the context of a business, is factual and the outcome of a long and complex negotiation process. Therefore, the price may not be fully observable at the initial stages of planning.

However, even when considering value, there are a variety of definitions that can only stir more confusion into the mix. Having said that, anything worth doing good takes a little chaos, and in the next article in this series, we will delve into some of these definitions in more detail and discuss how to pick the most appropriate one for specific requirements.

A myriad of considerations for businesses

Canada’s complex and dynamic business environment brings along a few different challenges and considerations that must be carefully taken into account when valuing a business, over and above its ability to generate cash flows and profits.

• Tax Implications: Canada’s complex tax regulations can significantly impact business valuations. Factors such as the Small Business Deductions, capital gains taxes, income taxes and provincial tax rules must be carefully considered.
• Industry-Specific Factors: Canada’s resource-rich economy and diverse sectors introduce unique challenges and opportunities. Valuations in industries like mining, forestry, and agriculture may require specialized expertise, while upcoming industries in tech, psychedelics and AI need significant amounts of data. While other factors such as changing consumer trends, business models of each player in the industry and adoption of technology can also have an important impact on businesses.
• Regulatory Environment: Compliance with Canadian regulations, including those related to corporate governance, financial reporting, and environmental standards, can influence a company’s value.
• Economic Factors: Canada’s economy is closely tied to the US and western markets. Recent fluctuations in interest rates, inflation, exchange rates, and commodity prices have had a significant impact on business valuations.
• Other business specific factors: Other business specific factors to consider include consumer retention, location and real estate, growth potential given the nature of the business, investment in assets, management team, retention of skilled employees, brand value, reputation and debt levels can all have an impact on business value.

The Role of Professional Valuators

Given that valuations are a regulated industry in Canada, with the CBV Institue leading the charge in setting industry standards and ensuring ongoing education for its members, engaging a qualified Chartered Business Valuator (CBV) with expertise in Canadian market conditions can be incredibly helpful. A professional can provide an objective assessment, ensure compliance with Canadian regulations, and help you navigate the complexities of business valuation.

The bottom line

Business valuation is a critical tool for Canadian businesses of all sizes. The primary objective here is to determine the most important value-generating aspects of your business. Identifying these critical areas is imperative for fostering business growth. Every business owner should recognize the specific elements within their operation that hold particular interest or value, thereby enhancing its overall worth and revenue potential and by understanding the unique factors that influence valuations, you can make informed decisions, protect your interests, and maximize the value of your business.