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Price and Valuation

November 29, 2022

Question:

When selling a business, how do you determine the actual price?

Facts:

Every business owner has contemplated when a good time is to sell their business or transfer it to a family member. The buyer and seller have to agree on a price but how does a seller determine the actual listing price? There are many factors that lead to this discussion.

Discussion

When selling a business, it is useful to have a business valuator prepare an analysis and value for the company. One common valuation method is based on expected annual income or cash flow which is normalized for such management salary as this is variable.  Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) is the calculation used based on past, current and expected future results. A multiplier is then applied to the expected annual cash flow to determine the valuation. The multiplier varies depending on the type of industry and other risk factors.

Another common valuation method is based on the appraisal of net assets (assets minus liabilities). If you do not want to hire a business valuator, then your accountant should be able to help you calculate the current value of your company. 

The seller will usually list the business for their asking price through a realtor or a business broker. Otherwise, the seller may also receive an unsolicited offer from a potential purchaser.   An unsolicited offer could come through customers, vendors, and other referral sources.

A negotiated price between seller and buyer usually includes a fixed price and a variable price. The variable price will be based on a formula that is determined by post-sale targets i.e… Revenue, Accounts receivable, etc.

Once a price has been negotiated, there will be a set time in the contract that will allow the purchaser to do their due diligence before they proceed. For more information, please see FAQ on Due Diligence.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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