BV101: Top 8 FAQs about Business Valuations
Business valuations, though often perceived as complex, are integral in the world of finance—no matter the size of your business. Understanding the basics of how they work can make all the difference when you eventually need one.
While we’ve previously explored the details of when you should get a business valuation and why, we get a lot more questions about them here at DMCL. With that in mind, let’s explore some of the more common ones and unravel a few of the mysteries around the process.
1. How long does a business valuation take?
The timeline for a business valuation hinges on its complexity. There are several factors that impact how long it takes, which include:
- Deadlines (e.g., contractual, financial reporting, etc.);
- Time to obtain the required information;
- The type of valuation required;
- The purpose of the valuation; and
- The size/complexity of your business
Generally speaking, a formal valuation completed in accordance with the Canadian Institute of Chartered Business Valuators (CICBV) standards should normally take between 3-4 weeks to complete.
2. How much does a business valuation cost?
Like its timeline, the cost of a business valuation varies based on scope, depth, type of valuation (i.e., calculation, estimate, comprehensive) and purpose (e.g., tax, financial reporting, etc.).
If it’s prepared in accordance with CICBV standards, you should also expect the associated fees to reflect the level of training, experience and expertise needed to conduct the valuation. Consequently, it’s not uncommon for the cost of a business valuation to exceed $10,000.
If you’re curious about the cost of a valuation for your business, contact your DMCL advisor and they’ll provide you with an estimate based on your unique needs and obligations.
3. What methods are used to value a business?
There are two primary approaches to determining the fair market value of a business: the income approach and the asset approach.
An income approach would be most relevant when the business being valued is a going concern, whereas an asset approach would be used when the business is not a going concern, when its underlying asset value closely constitutes the worth of the business (e.g., real estate) or when it doesn’t carry on an active business (e.g., holding companies).
Once an approach is selected, your valuator will choose a methodology to use. Each approach has its own set of methodologies, which are tailored to your situation based on factors such as:
- History of profitability;
- Prospects for future growth and expansion;
- The nature of your business;
- The availability/reliability of cash flow forecasts; and,
- Whether the company is a going concern
4. What is ‘goodwill’ and how is it calculated?
You may have heard the term goodwill thrown around in financial circles before, and it can be a tricky concept to understand since it’s an ‘unidentifiable intangible asset’.
Identifiable intangible assets are assets that can be transferred separately from the business that owns them and have intrinsic value on a going-concern basis. Common examples of these include software, patents, brand names and customer relationships.
Goodwill, on the other hand, is more general in nature and more difficult to quantify. It represents the difference between the going-concern value of the operations and the sum of the net tangible assets and the identifiable intangible assets. Examples of goodwill include:
- Management strength and reputation;
- Strong relationships with lenders;
- Skilled workforce and good employee relations;
- Post-acquisition synergies (applies when a transaction has occurred)
5. When selling a business, who pays for the business valuation — the seller or the buyer?
Under most circumstances, there’s no formal requirement to obtain an independent valuation when buying or selling a business. Therefore, it would be at your discretion as the seller or buyer to obtain one and pay for it.
That being said, there may be situations where a Shareholder Agreement explicitly stipulates that a formal independent valuation is required. In this case, the shareholders would negotiate who pays the fees or how the fees are allocated amongst shareholders.
6. What’s the difference between a business valuation and appraisal?
The mix-up between a business valuation and appraisal is understandably common. Simply put, a business valuation provides a conclusion on the fair market value of the overall business, whereas an appraisal is performed to determine the value of specific assets within the business (e.g., real estate appraisals).
7. What financial documents are needed for a valuation?
Thankfully, the documents required for a valuation are relatively available to most businesses. Your valuator will give you a comprehensive list which will likely ask for financial statements, tax returns, cash flow projections and other common business documents to ensure an accurate valuation.
8. How can I find a qualified professional to perform a business valuation?
Although not formally required, your best option is to engage a designated Chartered Business Valuator (CBV). CBVs are finance professionals who have been properly trained by the CICBV to become experts in understanding how to value every aspect of a business.
Our team of CBVs at DMCL specialize in delivering high-quality valuations tailored to your unique needs. No matter your situation or reasons for needing a valuation, reach out to your DMCL advisor and they’ll be happy assist you every step of the way.
Article written by Chris Riccio, CPA, CBV