Business Valuation Methods: What Your Business Is Really Worth
Complete guide to valuing your BC or Alberta business using proven methods. Understand income-based, asset-based, and market-based approaches tailored for Canadian sellers.
Why Professional Valuation Matters for Your Business Sale
Getting your business valuation right is one of the most critical decisions you'll make as a seller. An undervalued business leaves money on the table. An overvalued business sits on the market without offers. The right valuation attracts serious buyers and provides a foundation for successful negotiations.
The Three Main Valuation Approaches
Professional valuators use three primary approaches. Most use multiple methods and triangulate the results for accuracy.
Income-Based Approach
Values the business based on its ability to generate future earnings and cash flow.
Key Methods:
- →Discounted Cash Flow (DCF)
- →Capitalization of Earnings
- →Seller's Discretionary Earnings (SDE)
Best For:
Profitable businesses with stable or growing cash flows
Example:
A profitable software company with $500K annual earnings
Asset-Based Approach
Values the business based on the net value of its tangible and intangible assets.
Key Methods:
- →Book Value (Balance Sheet)
- →Adjusted Book Value
- →Liquidation Value
Best For:
Asset-heavy businesses, manufacturing, real estate, or liquidations
Example:
A manufacturing company with $2M in equipment and inventory
Market-Based Approach
Values the business by comparing it to similar companies that have sold recently.
Key Methods:
- →Revenue Multiples (3x-5x revenue)
- →EBITDA Multiples (4x-8x EBITDA)
- →Precedent Transactions
Best For:
Businesses with comparable sales data available
Example:
A service business compared to 3-5 similar firms that sold recently
The 5 Core Valuation Methods Explained
1. Discounted Cash Flow (DCF)
Projects your business's future cash flows and discounts them to present value, accounting for risk and time value of money.
Formula: Value = Sum of (Annual Cash Flow ÷ (1 + Discount Rate)^Year)
Real Example: A business expected to generate $200K annually for 5 years, discounted at 10% rate = ~$758K value
✓ Advantages
- •Accounts for growth and future potential
- •Most sophisticated and accurate for growing businesses
- •Preferred by institutional buyers
⚠ Limitations
- •Requires realistic cash flow projections
- •Sensitive to discount rate assumptions
- •Longer calculation process
When to Use: Use for profitable, growing businesses with predictable cash flows. Avoid if cash flows are highly unpredictable.
2. Seller's Discretionary Earnings (SDE)
Calculates the true economic benefit available to a business owner by adding back owner-related expenses.
Formula: Value = SDE × Industry Multiple (typically 2.5x - 5x SDE)
Real Example: Net Profit $150K + Owner Salary $80K + Vehicle $10K + One-time costs $5K = $245K SDE × 3.5x = $857.5K
✓ Advantages
- •Most common for small businesses ($500K-$5M)
- •Accounts for true economic benefit
- •Easy to understand and defend
- •Industry multiples are well-established
⚠ Limitations
- •Only for owner-operated businesses
- •Multiples vary significantly by industry
- •Requires accurate expense documentation
When to Use: Ideal for businesses under $3M in value where the owner is actively involved. Perfect for most BC/Alberta small businesses.
3. Capitalization of Earnings
Values the business by dividing expected annual earnings by a capitalization rate that reflects risk and required return.
Formula: Value = Annual Earnings ÷ Capitalization Rate
Real Example: Annual Earnings $200K ÷ 0.15 (15% cap rate) = $1.33M value
✓ Advantages
- •Simple and straightforward calculation
- •Good for stable, mature businesses
- •Cap rates are industry-standard
⚠ Limitations
- •Assumes stable earnings forever
- •Doesn't account for growth
- •Cap rate selection is subjective
When to Use: Use for stable, mature businesses with consistent earnings. Not ideal for growth-phase businesses.
4. Market-Based (Revenue & EBITDA Multiples)
Values the business by applying industry-standard multiples to revenue or EBITDA based on comparable companies.
Formula: Value = Revenue × Industry Multiple OR Value = EBITDA × Industry Multiple
Real Example: Tech SaaS: $1M revenue × 5x = $5M value | Service business: $500K EBITDA × 4.5x = $2.25M value
✓ Advantages
- •Based on real market transactions
- •Easy to understand and defend
- •Quick preliminary valuation method
- •Most common method used in sales
⚠ Limitations
- •Requires comparable company data
- •Multiples vary by industry and market conditions
- •Doesn't account for business-specific factors
When to Use: Use when comparable sales data is available. Most common for acquisitions and business sales.
5. Asset-Based Valuation
Calculates value by summing tangible assets, intangible assets, and intellectual property, minus liabilities.
Formula: Value = (Tangible Assets + Intangible Assets) − Liabilities
Real Example: Equipment $300K + Inventory $150K + Goodwill $100K − Debt $50K = $500K value
✓ Advantages
- •Grounded in balance sheet reality
- •Good for asset-heavy businesses
- •Simple and defensible
⚠ Limitations
- •Ignores earning power and cash flow
- •Goodwill valuation is subjective
- •Often undervalues profitable businesses
When to Use: Use for manufacturing, retail (inventory), real estate, or businesses with significant tangible assets. Not ideal for service businesses.
Which Valuation Method Is Right for Your Business?
Profitable Service Business (Consulting, Trades, Professional Services)
Recommended Methods:
SDE Method (Primary) + Market Multiples
Why:
SDE captures the true owner-earned income and is the standard for small service businesses. Market multiples provide market verification.
Growing Tech or Software Company
Recommended Methods:
DCF Method (Primary) + Market Multiples
Why:
DCF captures growth potential and future cash flows. Tech multiples are well-established and provide validation.
Retail or E-Commerce Business
Recommended Methods:
Revenue Multiples + SDE Method
Why:
Revenue multiples are standard in retail/e-commerce. SDE validates the actual profitability and owner benefit.
Manufacturing or Industrial Business
Recommended Methods:
EBITDA Multiples + Asset-Based
Why:
EBITDA multiples are industry standard. Asset-based approach validates tangible asset value.
Real Estate or Asset-Heavy Business
Recommended Methods:
Asset-Based Method (Primary) + Market Multiples
Why:
Asset value is the foundation. Market multiples provide secondary validation.
Canadian Tax Implications of Your Valuation
Lifetime Capital Gains Exemption (LCGE)
As a Canadian business owner, you may be eligible to claim the Lifetime Capital Gains Exemption (LCGE) when selling a qualified small business. For 2024, this exemption is $1,016,836, meaning you can realize up to this amount in capital gains completely tax-free.
Key Requirements for LCGE Eligibility:
- ✓ Business must be a Canadian-controlled private corporation (CCPC)
- ✓ You must own at least 10% of the shares for 24 months before sale
- ✓ Substantially all assets must be used in active business (not passive investments)
- ✓ Proceeds must be from sale of shares (not assets)
Important: If your business is valued above the LCGE threshold, structure your sale to maximize the tax-free portion. This can significantly impact your net proceeds.
Capital Gains Inclusion Rate
In Canada, only 50% of capital gains are included in taxable income. This means on a $1M gain, only $500K is taxable at your marginal rate.
Example Calculation:
- Sale Price: $2,000,000
- Less: Adjusted Cost Base (ACB): ($500,000)
- Capital Gain: $1,500,000
- Inclusion Rate (50%): $750,000 taxable
- At 43% marginal tax (BC): $322,500 taxes owing
- Net Proceeds After Tax: $1,677,500
Share Sale vs. Asset Sale
Your valuation strategy should account for whether you'll sell shares or assets. This significantly affects the tax implications for both buyer and seller.
Share Sale (Preferred for Sellers)
- ✓ Qualifies for LCGE exemption
- ✓ Single capital gains inclusion
- ✓ Business goodwill not separately taxed
- ✗ Buyer inherits all liabilities
- ✗ More complex due diligence required
Asset Sale (Preferred for Buyers)
- ✓ Buyer gets tax deductions on assets
- ✓ Buyer can step up asset basis
- ✗ Seller pays multiple layers of tax
- ✗ Goodwill taxed as income (not capital gains)
- ✗ Typically results in lower value for seller
Important: Tax implications of your business valuation and sale structure are complex. Consult with a Canadian accountant and tax specialist before finalizing your sale strategy. They can optimize your structure to maximize net proceeds after taxes.
How to Increase Your Business Valuation Before Selling
Improve Financial Records (12 Months)
Can improve valuation by 10-15%
- Clean up all financial statements for past 3-5 years
- Document all discretionary expenses clearly
- Reconcile tax returns with financial statements
- Implement proper accounting systems
- Separate personal from business expenses
Grow Revenue & Profitability (12-24 Months)
Can improve valuation by 20-40%
- Implement growth initiatives before sale
- Focus on recurring revenue (increase predictability)
- Reduce cost of goods sold and overhead
- Improve profit margins
- Demonstrate positive revenue trends
Reduce Owner Dependency (12-24 Months)
Can improve valuation by 15-25%
- Build management team around you
- Document standard operating procedures (SOPs)
- Develop key person succession plans
- Create recurring relationships with top customers
- Reduce customer concentration risk
Address Legal & Compliance Issues (6-12 Months)
Removes valuation discounts and risk premiums
- Resolve any tax or CRA issues
- Update all business licenses and permits
- Review and update all contracts
- Ensure worker's compensation compliance
- Document insurance coverage adequately
💡 Pro Tip: Start Early
The best time to improve your valuation is 24 months before you plan to sell. This gives you time to implement changes, see results, and document improvements. A preliminary valuation at the 24-month mark can guide your improvement efforts and identify which changes will have the biggest impact.
Engaging a Professional Business Valuator
Why Hire a Professional?
- Produces independent, defensible valuation
- Identifies value drivers and improvement opportunities
- Uncovers hidden financial issues before buyer does
- Supports fair market value in negotiations
- Provides documentation for legal/tax purposes
- Expertise in Canadian tax and deal structures
Types of Valuators
Chartered Business Valuator (CBV)
Professional designation from CICBV. Highest credential in Canada. Recognized by courts and CRA.
Accounting Firm Valuators
CAs, CPAs with valuation experience. Good for tax-efficient structure planning.
Investment Banking / M&A Advisors
Specializes in acquisitions, deal structuring, and buyer matching.
Business Brokers
Valuations based on market approach and comparable sales.
Three Levels of Valuation Reports
Report Type
Calculation Report
Scope
Basic, limited details
Typical Cost
$2,000 - $5,000
Timeline
2-3 weeks
Report Type
Estimate Report
Scope
Mid-range detail, good assurance
Typical Cost
$5,000 - $12,000
Timeline
3-6 weeks
Report Type
Comprehensive Report
Scope
Highest detail, thorough corroboration
Typical Cost
$12,000 - $25,000+
Timeline
6-12 weeks
Recommendation: Most BC/Alberta sellers should start with an Estimate Report at the 24-month mark to identify improvements, then order a Comprehensive Report 3-6 months before listing.
Frequently Asked Questions
What are the 3 main business valuation methods?
The three main approaches are: (1) Income-based methods that value future earnings potential (DCF, capitalization, SDE), (2) Asset-based methods that calculate value from balance sheet assets and liabilities, and (3) Market-based methods that compare your business to similar companies that have sold or are publicly traded. Most professionals use multiple methods.
How do I know which valuation method to use?
Use income-based methods for profitable businesses with stable cash flows. Use asset-based methods for businesses with valuable tangible assets or those being liquidated. Use market-based methods when comparable company data is available. Most professionals use multiple methods and triangulate the results for accuracy.
What is Seller's Discretionary Earnings (SDE)?
SDE is the true economic benefit available to a business owner. It starts with net profit and adds back owner-related expenses (owner's salary, vehicle, personal expenses, one-time items) that a new buyer wouldn't need to pay. Small businesses under $2-3M often use SDE-based valuations with 2.5x-5x multiples.
How does the Lifetime Capital Gains Exemption (LCGE) affect my valuation?
Canadian business owners can claim up to $1,016,836 (2024) in tax-free capital gains when selling a qualified small business. Understanding your LCGE eligibility should inform your valuation strategy and sale structure to maximize tax efficiency. A CBV can optimize this.
Should I sell the business or just the assets?
This depends on your business structure, tax situation, and buyer preferences. A share sale preserves goodwill and simplifies transition but can trigger more tax for the seller. An asset sale gives buyers more control but may result in lower value. Discuss with your accountant and valuator.
How far in advance should I get a professional valuation?
Industry experts recommend starting the valuation process 24 months before you plan to sell. This gives you time to address any value drivers the valuator identifies, clean up financial records, and prepare your business for market. A preliminary valuation at 24 months can guide improvement efforts.
Ready to Understand Your Business Value?
Understanding your business valuation is the critical first step to a successful sale. Combined with our guides on how to list your business and how to market your business, you'll have a complete roadmap to selling for the best possible price.
Let's Value Your Business Accurately
A professional business valuation is one of the best investments you can make before selling. Let's determine what your business is truly worth in today's market.