Why Do I Need a Valuation?
Why Do I Need a Valuation?
In this blog, we discuss common situations that give rise to a Valuation.
Business valuation professional services have gone through a tremendous evolution over the past 40 years. This has been largely driven by legislative changes. To name a few, these include tax reform, stricter legislation related to securities, changes to the Canada Business Corporations Act, matrimonial law legislation changes, as well as accounting and auditing standards changes. Chartered Business Valuators (“CBVs”) are increasingly being relied upon to offer a broad range of services in many different types of circumstances to a variety of stakeholders.
So, what are some common situations
that give rise to a Valuation?
In the event of a marriage breakdown, determining the value of ‘business assets’ is required as these assets are subject to equalization. In addition to valuing business interests, valuators can also assist in structuring settlements between parties that are equitable, as well as provide income calculations that are in accordance with the Federal Child Support Guidelines.
Corporate Reorganizations and Amalgamations
Common corporate reorganizations include winding-up an existing corporation, transferring personal assets to a corporation, or transferring an unincorporated business into a corporation. Valuations may be required by the CRA in establishing fair market value for capital gains measurement and tax planning. The CRA requires that one make a ‘reasonable attempt’ at determining fair market value. Not doing so may result in adverse tax consequences.
Sale, Merger or Purchase of a Business
Valuators can assist in estimating the notional value of business. This serves as a starting point from a price negotiation perspective for transactions. Performing a business valuation early in the planning process, can assist business owners in better understanding the value drivers, thereby having time to improve these value drivers to maximize the realized value upon eventual sale.
Estate and Succession Planning
While the determination of fair market value upon death is a CRA requirement, valuators can also assist with ensuring that an orderly transition and distribution of assets occurs. Or, when considering the addition of a new shareholder or buy out of an existing shareholder, a business valuation may also be necessary.
In the event of a corporate divorce, the determination of value may be required should one of the business owners want an exit. In addition, if minority shareholders are being treated unfairly, or if a business is undergoing a fundamental corporate change, minority shareholders may want to have their interest purchased. The shareholders agreement may contain an agreed-upon formula for determining value, or it may stipulate that value is determined by a CBV.
In the event that public authorities expropriate or purchase a business, valuators can assist in determining the losses directly attributed to the expropriation. Such losses may include business relocation, business disruption or construction losses. In the event that a business is not able to relocate, the fair market value of the business may be the basis of the amounts paid to the business owner from the expropriating authority.
Quantification of Economic Losses
Valuators can assist in measuring economic losses in the context of litigation claims, such as breach of contracts, patent infringement, misrepresentations, business interruption claims, personal injury lawsuits, etc.
Employee Stock Ownership Plans (“ESOP”)
Valuators can determine the value of each share as it relates to designing an ESOP. Businesses that have ESOPs may seek to perform a valuation annually as a way to establish a price of entry or exit of the plan, or to measure productivity and other milestones.
In the event of business combinations, business valuators may be required to value the acquired entity and assist in the allocation of the purchase price (which may include intangible assets) for financial statement presentation purposes. Valuators may also assist in the calculation of the fair market value of goodwill, as well as annual goodwill impairment testing, for financial statement presentation purposes.
In the event that any of the situations discussed above apply to you, give the experts at Davis Martindale a call to see how we can be of assistance. We’d love to work with you.