Business Valuation Toronto $1,500 to $15,000 Appraisal and Valuation for Partnership and Divorce issues, CRA, Tax, Estate Freeze, Estate Rollover, Estate Planning.
Business Valuations in Toronto following Canada's governing legislation on business valuation.
Toronto (416) 639-6127
111 Queen Street E., Toronto, ON, CANADA M5C 1S2
ERIC@PIN.CA / Toll Free 1 800 606 0310
I am Eric Jordan and I am passionate about Business Valuation.
Do you want to value 100% of the assets in your company?
Do you want to to be compliant with the Canada Income Tax Act?
The chart shows us that 90% of Toronto business value is now made up of intangible assets.
Most valuators today have no methodology to measure intangible assets and generally ignore them or vaguely refer to them as “goodwill” (circa 1975 ) with no explanation as to what goodwill might be.
Our proprietary “25 Factors Affecting Business Valuation” methodology identifies, measures, weighs, and values 100% of company assets as required to be compliant with the Canada Income Tax Act.
It is abundantly clear the parameters of the business valuation debate have fundamentally shifted.
In Toronto intangible assets are now 90% and the most important asset base in a business.
For those of you who are working with clients who need business valuations for CRA, Divorce, or other purposes you may or may not know that the only legislation in Canada on Business Valuation comes from the The Income Tax Act and the Canada Revenue Policy Paper on Business Equity Valuations. They refer to different asset classes but they are clear that some asset classes should be given more weight depending upon importance. We believe this means the intangible assets that now make up on average 90% of business value should be considered in proportion to their contribution to company value.
We have a Methodology developed to facilitate the demands of the Income Tax Act as it pertains to the intangible assets. It is called “25 Factors Affecting Business Valuation”
We give each relevant factor a weight or dollar value and this is how we calculate “fair market value”.
The old methods from 1975 are now redundant;
Hard Assets Approach - (This might only represent 10% of a company’s value in 2022)
Income approach - (the multiple many use has no connection to the wealth creation factors)
Market approach (comparable sales) - This would be like relying on data coming out of Venezuela.
Revenue Canada sets the rules and if your clients valuation has ignored 60% to 90% of the value in the company (intangible assets) the valuation might not do so well on review. When parameters have changed like this precedent can no longer be relied upon.
There are some serious issues with much of the data used in generating “comparable sales” as we noted above.
The 1975 Business Valuation Methodology might be compared to a broken clock; (correct twice a day) but is that the way you want your client to have their business valued?
The weighing of Intangible assets in finding fair market value is reflected in Point 7 in the Tax Act Policy Paper “Depending on the nature of the corporation's business, certain of the relevant factors may be accorded greater weight. In some businesses, earnings may be the primary determinant of value, while in others it may be asset value. The valuator must consider a different combination of factors in each case in determining fair market value”.
“Certain of the relevant factors may be accorded greater weight.”
This is significant because for the last 15 years or more intangible assets have been by far the largest asset component in the average business. Most reports suggest in the range of 90% today.
Currently business valuators are hoping that precedent will protect their 1975 methods of business valuation. However it is abundantly clear the parameters of the debate have fundamentally shifted. Any good lawyer can easily show a court the chart on the fundamental change and how the Canada Income Tax Act Policy Paper requires all asset classes to be weighed.
Precedent and stare decisis
The doctrine that lower courts must follow the decisions of higher courts is fundamental to our legal system. It provides certainty while permitting the orderly development of the law in incremental steps. However, stare decisis is not a straitjacket that condemns the law to stasis. Trial courts may reconsider settled rulings of higher courts in two situations: (1) where a new legal issue is raised; and (2) where there is a change in the circumstances or evidence that “fundamentally shifts the parameters of the debate”.
The lawyer arguing that “stare decisis” is not a straitjacket will have to be experienced and competent.
Canada leads the world on business valuation governance.
This is important because all reasonable actions have been taken to ensure Eric Jordan’s 25 Factors are in compliance with "Policy Statement on Business Equity Valuations," From Canada Revenue Agency, No: 89-3, Date: August 25. 1989. (Modified 2002-08-27). Ensuring you are in the best possible hands for business valuation compliance.
Intangible assets within a company are the tools of wealth creation for the future.
Our experience based valuations estimate the value of these wealth creating tools to replace redundant accounting formulas to establish the multiple we use to determine the value of a business.
The entrepreneurs at Amazon and Apple taught us that intangible assets can be valuable for a long time even without dividend income. Our entrepreneurial and experience driven valuation methodology can recognize this in small and large companies.
BUSINESS VALUATION AND APPRAISALS
CERTIFIED BY ERIC JORDAN, CPPA
Fees: $3,500 to $8,500 - Avg
Quote: In 4 hours.
Time: 7 to 14 day turnaround.
Income Tax Act Policy: Source
"I worked closely with Eric to prepare a fair market valuation of my boutique consulting business in advance of a merger negotiation. Eric's assessment was astute, fair, and thoughtful. I believe his "25 factors" approach is comprehensive and MECE - mutually exclusive and collectively exhaustive. He spent a great deal of time deeply understanding my company's scenario, and had a genuine interest in learning about my business, and myself. I enjoyed our discussions, which went far beyond a transactional nature - Eric provided insight and perspective that was above and beyond my expectations. I would strongly encourage anyone considering Eric's services to engage him - he is well worth his fees and I believe I have made a connection for many years to come. Thank you Eric for your time and support."
Toronto creates its own economic wind. Toronto is unlike any other city in Canada. There is so much business activity that a business valuation for a company in Toronto and the whole GTA including Hamilton, Brampton, and Mississauga would have a higher value than if it was in another city in Canada.
Did you know?
Eric’s Gold Standard Business Valuations can document your intangible assets to the point where
they can be legally filed with the Ontario government to help prove ownership.
Intangible asset questions that should be asked of every business valuator?
To our knowledge there is no business valuation group or association with a robust methodology or system in place to value intangible assets and produce a tax compliant business valuation in Canada or the world that can compete with Eric's Gold Standard.
CALL NOW FOR YOUR GOLD STANDARD CANADIAN BUSINESS VALUATION
If you are in a divorce or other legal situation and you don’t have a lawyer, we can help you find a lawyer in Toronto or in other city in any first world country who will understand “fair market value” as presented in our valuation methodology
What follows is a rather long detailed explanation of our “25 Factors Affecting Business Valuation” methodology and the 5 Position Papers that go with it and how it follows the Canada Revenue Agency Policy Statement On Business Equity Valuations.
WHAT WEIGHT DO INTANGIBLE ASSETS HAVE?
25 Factors Affecting Business Valuation
|4. Return on Investment (ROI)|
|6. Cost of Liquidation|
|7. Hard Assets|
|8. Utility, Sustainability, and Scalability|
|9. Research & Development (R&D)|
|10. Processes, Procedures, Systems, and Documentation|
|11. Shareholder Agreement|
|12. Management Capability, Workforce, and Intellectual Property|
|13. Client Base|
|14. Supply Chain|
|15. Distribution Network|
|16. Marketing (Advertising, PR, Brand & Crypto Promotion)|
|17. Dominance in the market|
|18. Industry benchmarks (averages)|
|19. Terms of lease|
|20. Terms of Sale|
|21. Minority Interest|
|22. Special Interest Purchaser|
|23. Geopolitical considerations|
The object of the methodology is to determine the factors and sub factors within a business and weigh them as required in point 7 of the Income Tax Act Policy Paper.
Utility, Sustainability, and Scalability
Cumulative Value of Marketing, Brand, and Advertising
Cumulative Value of Research and Development
Cumulative Value of the Workforce - Key Employees, Management, Regular Employees, and Contractors.
Value of the Client Base.
The Position Papers provide real world proof, with examples, that the factors are real, important, and purposefully dovetail with the 41 points in the Income Tax Act Policy Paper.
From: Canada Revenue Agency
SUBJECT: Policy Statement on Business Equity Valuations
Weighting of Various Factors
Depending on the nature of the corporation's business, certain of the relevant factors may be accorded greater weight. In some businesses, earnings may be the primary determinant of value, while in others it may be asset value. The valuator must consider a different combination of factors in each case in determining fair market value.
I discuss with clients, in depth, the relevant 25 Factors to find what weight should be given to each factor as the act requires for reaching the fair market value. As we go through these 25 Factors, other sub factors almost always come up. Examples might be “scarcity” or “timing”. This is where business experience enters into the process. In my experience I have found hundreds of “sub factors”.
25 Factors Affecting Business Valuation system does not consider unverified mass purchased, business sale price data to be reliable enough to be used in compiling “comparable sales information”, which may or may not be “comparable”. Who spoke to the seller?
Eric's 25 Factors Methodology Resolving Non-Compliance Issues
The 25 factors methodology resolves non-compliance issues, captures your intangible assets, and delivers a business valuation that follows the Tax Act Policy Paper.
Why are we the only valuation firm in Canada that will refer you to the Income Tax Act Policy Paper governing business valuation? Being compliant with the legislation is what counts. We can show you exactly how and why we are compliance friendly and how we go far beyond what is required.
See below a review of the 41 points in the Tax Act Policy Paper that show how Eric Jordan’s “25 Factors” methodology is more than compliant with the Income tax Act, while others are likely to be found non compliant. Source
If my client was facing one of the standard valuations, these are the recommendations I would make to their lawyer:
What if Canada Revenue Agency is asking these questions?
WHAT ABOUT FAIR MARKET VALUE IN VALUATIONS?
Eric Jordan (CPPA)
My qualifications are based on 8 points:
1. When one reviews the Income Tax Policy paper it suggests that my methodology and process
meet and exceed the requirements for considering “fair market value” and producing a business valuation
report that follows with the Income Tax Act Policy Paper.
2. I am accredited by, and a member in good standing of The Canadian Personal Appraisal Group (CPPA). The CPPA has more than 700 members from all Provinces. As a CPPA, I am experienced in the valuing of tangible and intangible assets. CPPA’s have been accepted as experts in courts across Canada. One can go to www.canlii.org and in the Document Text search field enter “Canadian Personal Property Appraisers Group”. A search here will find at least eight cases for review. Being a member of any professional group such as doctor, lawyer, accountant, auctioneer, or estate agent is not required under the Income Tax Act. Being experienced to produce a compliant “fair market value” is important however.
3. Because the intangible assets are identified, documented, and measured, they can filed under Uniform Standards of Professional Appraisal Practice (USPAP) in the US and similar legislation in Canada.
4. My business valuation experience covers approximately 200 valuations incorporating tangible and intangible assets during the period 2013 to 2022 across Canada, including Quebec. Clients are business owners and lawyers spanning most industries including manufacturing, tech, agriculture, retail, wholesale, online, transportation, hauling, trades, the service sector, and crypto and non-fungible tokens.
5. My methodology was accepted by Judge Macleod, Court of Queen’s Bench of Alberta document enclosed in a judgement handed down on 9 May, 2017. (See the attached judgement record).
6. I can demonstrate more than 30 years of relevant business experience including determining the value of tangible and intangible assets in various ventures. It is my professional assertion that this experience is an important contributor to the creation and application of my valuation methodology.
7. By building on my relevant business experiences, I produced the proprietary “25 Factors Affecting Business Valuation Model”. This evolved, along with my valuation experience, to be the robust system as it now stands. My most recent addition for valuation consideration was blockchain assets and non-fungible tokens which is a highly specialized area and evidence of the utility of my approach.
8. See below a review of the 41 points in the Tax Act Policy Paper that suggests Eric Jordan’s “25 Factors” methodology is more than compliant with the Income tax Act, while others are likely to be found non compliant. Source
WHAT IS THE VALUATION PROCESS?
These are the implementation steps required by my proprietary and copyrighted system.
Step 1. Analyze the Balance Sheet: For example, it may be that a well-capitalized company has $600,000 retained as required capital in the balance sheet. In this hypothetical case, we would calculate a capital charge of perhaps 6%. or $36,000 against the income of the company. Subject to other factors.
Step 2. Normalize the Financial Statements: Meaning move all the assets to fair market value.
This ensures payments to self or related companies are at fair market value, and if not, then adjust. (Note the capital cost must be deducted)
Step 3. Value Normalized Net Income: This requires weighing and determining the multiple or number to be applied and why. This is where we apply the Position Papers and the “25 Factors Affecting Business Valuation” to produce the required valuation that is supported by unique facts related to the company as required in Point 7 of the Tax Act Policy Paper. This is the “utility” of the 25 Factors system that makes it unique, transparent, so accurate, and compliant friendly.
WHAT BUSINESS EXPERIENCE IS NECESSARY?
Who is Qualified?
The Income Tax Act which is the legislation governing business valuations in Canada Policy Statement is specific in that it does not give special status. “The valuator must use reasonable judgment and objectivity” (which suggests experience).
“Fair market value”
and “giving more weight to certain relevant factors” are recurring
themes one finds in the Canadian Income Tax Act Policy Paper. The Policy Paper in Point 7
demands that “certain of the relevant factors may be accorded greater weight”. In 2022
and going forward we know intangible assets are the largest asset group, in many cases
up to 90% of company value is intangible assets.
Our methodology includes 25 Factors and 5 robust Position Papers with emphasis on weighing intangible assets to reach fair market value. When using the 25 Factors methodology, we follow the Income Tax Act Policy Paper.
We think our way through the business valuation, following the 41 point Canada Revenue Agency Policy Paper.
What you get is a “Hands On” or more properly speaking, a “Mind On” valuation by a business professional who understands how to use the 25 Factors Affecting Business Valuation system supported by the extensive Position Papers that go with them.
One must turn on the mind and let the 25 factors methodology work.
This is where the valuator needs to have significant business experience. Our business valuations are done only by people who have had 10 years or more experience in owning and operating a small business, "learning to do by doing" and gaining the necessary experience and wisdom. This is experience, wisdom, and skill sets that can never be taught in a course or at a school?
This is hard for some to understand but If you are a seasoned business owner, you understand well the skill sets I am referring to.
Intangible assets are strategically important, and generally the largest part of business value that must be fully weighed in a business valuation to be compliant with point #7 in the Income Tax Act Policy Paper.
Without this business experience the valuator is not going to pick up on the nuances, and would likely miss a lot of sub factors in the business during the intake process.
To our knowledge there is no competing business valuation group or association with such a robust methodology or system in place to value intangible assets necessary to produce a fair market value business valuation in Canada or the world that meets or exceeds the 41 points described in the Canada Revenue Agency Policy Statement On Business Equity Valuations.
WHAT DOES RELEVANT BUSINESS EXPERIENCE MEAN?
Example of what relevant business experience means?
A good example is a person who acted as a painting contractor painting houses in the summer while working their way through college; followed by a 3 year partnership with a college friend in an internet based dog walking service that was not going anywhere and was sold for small money. This followed by a 15 year successful flower delivery service that grew rapidly and was sold at a handsome profit.
Bad example of relevant business experience:
The person who took over and ran for 18 years, the family business consisting of owning and renting parking space downtown; would not qualify.
Even if someone had a business degree from Queens, I would need to see a few years of relevant business owner operator experience on their resume before I would try to train them in the 25 Factors Affecting Business Valuation methodology.
THEN THERE ARE TANGIBLE ASSETS TO VALUE.
Who has the experience and training?
To our knowledge there is no business valuation group or association with a robust methodology or system in place to value intangible assets and produce a fair market value business valuation in Canada that can compete with Eric Jordan's gold standard: By their own admission this would include most if not all of those working with the International Valuation Standards Council (IVSC) where many distinguished intellectuals from Canada sit, and where the largest business valuation group in Canada is a leading member. They have recognized their serious deficiency in understanding intangible assets across the industry. They sent an email December 1, 2021. With the title: Time to Start Getting Tangible About Intangibles
HAVE CLIENTS AND COURTS BEEN MISLEAD?
In this edition:
Perspectives Paper: Time to get Tangible about Intangible Assets
Intangible assets have long been the engine for value creation in the world’s developed economies. The investment in intangible assets, both internally generated and through acquisition, is critical to an enterprises’ capital allocation process. Similarly, investors’ ability to identify those enterprises best able to translate such investments into long-term returns is equally as critical.
The limitation of current accounting standards to convey value creation and preservation activities is largely because the prevailing value creation strategies that existed when the standards were enacted decades ago, have evolved. As many current business models have evolved over decades, namely, to rely more heavily on intangible assets at the expense of tangible, the standards and the economics have become misaligned. This article series looks to contribute to realigning accounting and reporting standards with the value creation and preservation strategies utilised in modern business models. To do this, we explore key questions that must be addressed, including:
15 years late they are starting to ask questions. One might suggest courts and clients have been badly misled since 2005 when the Intangible Asset portion of business value reached 80%. See the chart.
The World Economic Forum suggests that 87% of business value is intangible assets: Source
Eric believes courts have been mislead and stakeholders have been cheated out of hard earned cash.
There is good news: There are over 217,000 accountants in Canada and internationally who hold the Canadian
Thankfully less than 2% of these CPA’s engage in what I believe are non-compliant business
valuations where they don't properly account for Intellectual Property, and may use
unverified mass purchased, business sale price data to render “comparable sales information”
which may or may not be “comparable”. Who spoke to the seller?
This means there is more than a 98% chance your accountant is one of those who stick to accounting.
Many accountants have us do valuation work for
their clients who are doing Section 86 Estate Freeze or Section 85 Rollover procedures.
IS DETAILED AND VERIFIED BUSINESS SALE PRICE DATA IMPORTANT?
Comparable Small Business Sale Prices Are Not Reliable.
Brokers and other business valuators seem to believe in the John Chretien quote.
“A proof is a proof. What kind of a proof? It's a proof. A proof is a proof. And when you have a
good proof, it's because it's proven”.
“There are three types of lies -- lies, damn lies, and statistics.”
Without a meaningful way to calculate intangible assets, valuers typically take another easy way out. They buy data from data brokers and render it into what they call “Comparable Business Sale Prices”.
I believe the sale price data they buy is not incorrect but in most cases is inadequate in depth to suggest the comparable business is actually comparable.
I am not suggesting business sale price data is incorrect. My concern is the lack of intangible asset depth in the data collected, and the way valuators use business sale price data without knowing if the intangible asset components are truly comparable.
Let me know how can I help you.
NOTE HOW THE INFORMATION GATHERING DIFFERS BETWEEN 25 FACTORS AND THE INFORMATION GENERALLY AVAILABLE IN THE COMPARABLE SALE PRICE DATA THAT IS BEING SOLD.
25 Factors Methodology
Regularly Offered Comparable Sale Price Data
Return on Investment (ROI)
Return on Investment (ROI)
Cost of Liquidation
Cost of Liquidation
Utility, Sustainability, and Scalability
Utility, Sustainability, and Scalability
Research & Development (R&D)
Research & Development (R&D)
Processes, Procedures, Systems, and Documentation
Processes, Procedures, Systems, and Documentation
Management Capability, Workforce, and Intellectual Property
Management Capability, Workforce, and Intellectual Property
Marketing (Advertising, PR, Brand & Crypto Promotion)
Marketing (Advertising, PR, Brand & Crypto Promotion)
Dominance in the market
Dominance in the market
Industry benchmarks (averages)
Industry benchmarks (averages)
Terms of lease
Terms of lease
Terms of Sale
Terms of Sale
Special Interest Purchaser
Special Interest Purchaser
We have additional damning information that was sent to us that shows the inadequate quality of the sale price data that is being sold to the business valuation industry worldwide. Even a video. Available to a court upon request.
Comparable Sales prices are legitimate factors when one is valuing tangible assets such as farm machinery, construction equipment, restaurant equipment, and residential housing in similar areas where there are many recent sales to use for price comparison. Unverified comparable sale prices for business valuations should never be used in an Income Tax Act compliant business valuation. The type of information a valuator would need to establish a true “comparable sale price” is usually very private information and I highly doubt families and private businesses would release it.
If you were comparing 6 oil and gas drilling companies each doing in the 10 Million dollar range a year in sales within the same geographic location and province or state with the same rules and regulation; then the comparisons between the public and private company could be similar and likely a good comparable. This is a far stretch from what the data sellers are offering.
If my client was facing one of the standard valuations produced by most of the current business valuators in Canada using unverified sale price data; this is the recommendation I would make to their lawyer.
WHY do the big multinational accounting firms and their followers like to use business sale price data in their valuations for private companies?
Because it is easy money.
Valuation firms buy the “comparable business sale price data”
They have accounting people with little or no business experience apply math formulas to the “sale data” they purchase and voila.
This is how many business valuation prices are derived.
Comparable Sale Price adequacy in 1975 might have been acceptable, but certainly not in 2021.
The Bottom Line:
“Comparable Sale Prices” must honestly be “comparable” CRA could drive a truck through a valuation based on incomplete, non verified data without depth. Clients should not want to be there.
Public company to public company business sale price comparable data MIGHT be acceptable
for some purposes.
BUT not for small business valuation purposes. How do we know the amount of perception, emotion, media promotion, and possible manipulation by powerful people and elites that has been calculated into the public company price?
Using public company sale price data for small businesses or private companies valuation is not logical, reasonable, or practical if one is interested in accuracy.
I seldom get involved with public company valuation.
Experts suggest Public Company sales compared to private company sales have major flaws such as: market liquidity, profit measurement, capital structure, risk profile, differences in operations and operational control.
Going forward, who believes pre covid comparable business sale information would be applicable for post covid valuations? Be very concerned if your valuator uses “Comparable Business Sales” from any time period.
A Valuation Report using these nonsense comparables and math formulas can give the reader a warm feeling, but so can wetting your pants, and with a lot less harm.
Click to enlarge photo.
DO AUCTIONEERS UNDERSTAND FAIR MARKET VALUE?
CPPA and Auctioneers.
CPPA stands for Canadian Personal Property Appraiser. This group was formed by a group of mostly AUCTIONEERS back in 1995 so that they could have a formal and documented format to use that followed the Uniform Standards of Professional Appraisal Practices that could be accepted in court. Experience was the key factor. Most business people would agree that auctioneers know a lot more about real time, on the ground, tangible asset value, than any other group or profession. I personally held an auction license in the early 1980’s
Nobody goes to the auction industry for tax advice.
Why would you go to your tax advisor to find fair market value on used equipment?
The founders of the Canada wide and 700 strong Canadian Personal Property Appraisers Group (CPPA) were both Auctioneers and Court Approved Valuation Experts. I am also a proud CPPA member and a former AUCTIONEER.
CPPA Experience Recognized by Courts
One can go to www.canlii.org and in the Document Text search field enter "Canadian Personal Property Appraisers Group" When you hit the search button you should find at least 8 cases you can review.
Judges Value Experience
Eric was wonderful to deal with. He was very knowledgeable on the topic of business valuations and took the time to listen to my fears and concerns. He asked me questions and gave me sound advice that helped me feel at peace. Eric was honest and wise and I would fully trust his experience. Although Eric didn't need to perform a business valuation for me at this time he listened to my concerns and was honest about the services he offered. Eric also talked to me for a long time getting a scope for my situation and didn't charge me at all for what services he did provide. Thanks Eric. -Amber.
As a lawyer, accurate business and personal property appraisals are often essential to resolve negotiations and formal disputes. I am familiar with the work of Eric Jordan, CPPA, and I would recommend his services to anyone seeking a valuation to resolve a dispute or to purchase or sell a business. -Mark W. Hundleby,Barrister and Solicitor
Just a quick note to tell you that CRA appears to have accepted the evaluation you did regarding my shares, having sent us a "balance owing" letter of $00.00.
We are relieved to have the whole ordeal over with. Thanks so much for all your help and expertise.-Nadine and Fiona
TSX - Fair Value Report
When a small publicly traded TSX listed company needed a report on fair value to meet TSX requirements they turned to Eric Jordan at Pin Services Ltd. You can view the opinion on fair value report as part of the documentation for the Securities Commission.
When Evan Lindsay needed to understand the value of his gym he worked with Eric Jordan. (LINK PENDING) "Working with Eric was a productive experience. He listened, was direct and was transparent, providing great feedback on my business. The final report was professional and conveyed the value that my company had built for the last 5 years. I look forward to working with Eric again in the future and highly recommend his services." -Evan Lindsay, Saskpro CrossFit.
Alberta Treasury Branch
Alberta Treasury Branch needed a business valuation before they could provide Wendy Coombs a business loan for the purchase of another medical clinic business in Calgary. (LINK PENDING) "We recently applied for a bank loan to finance the acquisition of a medical clinic in Calgary Alberta. We have been customers of Alberta Treasury Branch for 18 years and despite having many prior business loans, for the first time ever they required a Business Valuation completed by an experienced business evaluator. Banks are becoming even more risk-averse and the requirements for financing increase with respect to their due diligence. We presented Eric Jordan from Pin Services Ltd. The Alberta Treasury Branch agreed Eric had the experience they were looking for in an evaluator. His business valuation was very thorough and not only did it get us the financing we needed, but it was also very useful in facilitating the negotiations and securing a fair price for our business purchase." -Wendy Coombs CEO, VP Business Development Momentum Health.
Before modern medicine, your “barber” was your “dentist”.
Auto manufacturing was owned by Detroit.
Elon Musk and The Venture Capitalists understand the valuation of intangibles in big business and measure them well most of the time.
The answer for small business and private company valuation is best stated in step 3 of our Process. This is the “utility” of the 25 Factors system that makes it unique, transparent, so accurate, and compliance friendly.
Value Normalized Net Income: This requires weighing and determining the multiple or number to be applied and why. This is where we apply the Position Papers and the “25 Factors Affecting Business Valuation” to produce the required valuation that is supported by unique facts related to the company as required in Point 7 of the Tax Act Policy Paper.
Trained with, and using my proprietary methodology and system; people well experienced in business ownership, could work with an auction firm or similar business. With my methodology these firms could produce a far superior business valuation than any other group worldwide currently working in the business valuation industry.
If leaders in the auction industry or similar industries would want to work with me anywhere in the world, I am open to a conversation.
Let me know how can I help you.
Valuation Experience - Eric Jordan
CPPA - Detailed Experience
My name is Eric Jordan. I am a CPPA which means Canadian Personal Property Appraiser. There are over 700 CPPA's across Canada. I specialize in Business Valuations. The Canadian Personal Property Appraisal Group provides members a proper legal structure with which to do valuations. They do not give instruction on anything other than how to use the forms and templates they provide to make a legal appraisal or valuation report. I am providing the following information on my experience because experience is the key ingredient in my credentials and my experience is extensive, relevant and when combined with my proprietary system I describe in the book "25 Factors Affecting Business Valuation" allows me to deliver what many believe to be the most accurate small Business Valuation available in Canada today.
I was born in 1952 in Southwestern Manitoba. Like many other boys that were born on a farm / ranch I was a member of the local 4H beef club. The Canadian 4-H motto is "Learn To Do By Doing". It was at the age of 12 to 15 that I received my first training in valuing or judging. My 4-H group provided a lot of training in judging cattle. Like business valuation the process involved many factors. I enjoyed this and did well at the judging competitions.
I got started in the construction industry at 16 learning about steel stud framing, drywall, drywall taping, acoustical tile, and other types of ceilings. I took training as an apprentice and at 19 years-old I was a sub trade foreman at the construction of J H Bruns Collegiate in Winnipeg Manitoba.
Learning to Listen
I soon started my own business doing textured ceilings. I learned a lot of important lessons while running this business. The most important was learning to listen. I did specialized work. I would texture the ceilings in houses that were occupied as I had perfected a way to do this while protecting all the furniture and accessories in an effective and efficient manner. I would book work over the phone and set up a route that could take me from Manitoba to Alberta and back. One did not want to arrive at a house and find the work was impossible to do or that the owner was not likely to pay on completion. I was successful in that business. The key was to listen, listen, and listen. Asking the right questions and then listening carefully was critical to finding the correct information. Hearing the nuances became easy after a while. This is a very useful tool I use to this day while seeking information in the valuation process.
Introduction to Small Businesses
It was at about this time I got involved with the advertising business. I did advertising placemats across South Western Manitoba and Saskatchewan. If any of you are old enough and frequented Buddy's Steak Ranch on Albert Street in Regina, SK or Aunt Sarah's Restaurant in Brandon MB. you may remember my placemats with a character called "Prairie Tom" in the middle surrounded by squares of advertising.
I don't believe my creation died when I quit doing the placemats. A short time after that "Coffee News" publication started in Winnipeg, Manitoba and the character they use to this day looks amazingly similar to "Prairie Tom". I believe I at least partially inspired the creation of that very successful publication and I am very happy for that. The placemat advertising business put me into hundreds if not thousands of small businesses where I got to deal with the owners. Great experience for my future valuation career as my eyes were beginning to open as to what really happened in a small business. .
Auction Business - Learning to See
In about the same time period I had a mentor Charlie Salfries who was sure that I should be in the auction business. I ended up doing about six auction sales in 1980 and held an auction license in Brandon Manitoba. This was a real learning experience for understanding value and being able to see and feel how live events work. Nobody understands value better than auctioneers. When the Canadian Personal Property Appraisers Group started in 1995 most of the first members were auctioneers from across Canada.
One on One - With Hundreds of Small Business Owners.
The next business I got involved with was the movie business where I owned several rental stores and operated a movie broker business. In those days movies were a sideline to almost any kind of small business. I walked into thousands of small businesses and introduced myself. Hundreds ended up dealing with me. During this two to four hour process of dealing with the client on these video tapes, I really started to learn about what happened in a small business. Not all of the money went into the till. These business owners were happy to have someone to confide in. They would tell me amazing ways they saved on paying tax and all sorts of quirks about their particular business and industry. My experience extended to the US, as I purchased movies from small businesses then leased and sold these movies back into Canada. From this experience I could now understand what really happens on the ground in a small business as compared to what shows in the financials. This was invaluable one on one experiences with hundreds of different business owners across all sorts of industries. One can never learn these things in academia and I have a real edge on those who don't have this type of experience, most especially those situations where bookkeeping is suspect or non existent.
Pin.ca - Helping Business Owners Advertise for Buyers
Some video clients would tell me that they were selling so I should not leave movies with them as their business would be sold and gone by the time I was back in three months. My experience at that time suggested otherwise and I would ask them to just call me if they sold and leave the movies with a neighbouring business in the town. Two years later the business would often close down "unsold" and there would be an empty building for sale.
This is where I got the idea to set up an Internet showroom or catalogue of businesses for sale on the Internet. I was correct and the Pin.ca website has been successful helping business owners to find buyers for the past twenty years.
Working with hundreds of small businesses, advertising to the market place, I got to understand about valuation. I had a client who was a Chartered Accountant who helped me to understand from the accounting industry viewpoint, how they look at valuing a business. I knew however that that was not the whole story. At about the same time I had a client who was a Resume Broker. He had a formula for getting inside his clients head and finding out what intellectual property they retained in their brain. He would write that into a resume and these people would easily find a job. I knew that same thing would work with a small business. A friend of mine Reid Nunn had spent a long time in the insurance industry and he taught me a lot about risk. Between those three things I was able to start to put the pieces together for doing an accurate business valuation and that was the beginning of the 25 Factors Affecting Business Valuation.
CPPA Certification (National Accreditation)
This brings us to 2015. I had a formula and a lot of experience but I lacked the legal structure to present a business valuation to a court. That is when I reached out to the Canadian Personal Property Appraisers Group in London, Ontario. I got certified through them and became a CPPA. Now I had a proper legal structure for doing my business valuations. Canadian Personal Property Appraisers Group teaches you the legal structure you must use to produce a valid Valuation. The CPPA certificate for me now is really a moot point as my experience and the legal structure I use stand on their own.
For those people who need Income Valuations done, I offer my experience dealing with thousands of small business owners across Canada. Hundreds of these were close business relationships forged over time. This combined with my credentials should put me at the top of any list for an INCOME VALUATION.
Bitcoin and Intangible Assets
By 2013 I had my valuation process fairly well in place and had spent thousands of hours researching intangible assets which I felt were the most valuable part of a small business. I was doing business valuations and I decided to test my process on the toughest intangible asset in the world "Bitcoin"
I purchased 78 Bitcoins and proceeded to test.
My process led me to believe the key element in Bitcoin was the "blockchain" and for the reason of the blockchain, I deemed that Bitcoin would have value in the future. I predicted $500 Bitcoin, $1,000 Bitcoin and the real possibility of much higher. I think everyone can agree my analysis was correct and Blockchain has proven valuable.
Crypto and Blockchain Applications Including Promotion
Crypto and blockchain applications are emerging as disruptive factors in some business sectors and companies. Understanding where blockchain applications could be employed within a business is uncommon in 2021 and largely unknown outside of Venture Capitalist circles.
Herein lies the advantage.
As with websites and online selling twenty years ago, early blockchain adopters in business will gain dominance over the less agile companies. Does anyone in Canada remember Sears?
If Crypto matters in your company and your valuation (past, present, or future), a valuator that understands crypto and blockchain is vital.
Experience is the key factor. I have done hundreds of business valuations and my valuations have been accepted by CRA and Court of Queen's Bench. Numerous divorce proceedings across Canada have been concluded using my valuations, and filed with the courts. (including Quebec)
From: Canada Revenue Agency
DATE: August 25, 1989
SUBJECT: Policy Statement on Business Equity Valuations
Please note. Eric Jordan annotated the policy statement to indicate the alignment of the 25 Factor approach with the Policy.
His annotations are highlighted in red.
1. This Information Circular outlines the valuation principles, practices and policies that the Department generally considers and follows in the valuation of securities and intangible property of closely-held corporations for income tax purposes. (Recognized in Eric Jordan’s 5 Position Papers and 25 Factors Affecting Business Valuation)
2. All valuations should be made in accordance with the provisions of the Canadian Income Tax Act and the Income Tax Regulations. (Recognized in Eric Jordan’s 5 Position Papers and 25 Factors Affecting Business Valuation)
3. (a) Fair market value is the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact.
(b) Value, as found in paragraph 7(1)(a), is generally interpreted by the Department to mean fair market value.
(c) A closely-held corporation is a corporation whose shares are owned by a relatively limited number of shareholders. There is no established market for such shares, in that they are sold infrequently.
4. The Circular discusses, in general, the approaches applicable to closely-held or private corporations, recognizing that the facts and circumstances of each case will be determinative of fair market value. The valuator must use reasonable judgment and objectivity in the selection and analysis of the relevant facts of each valuation. (Compliance comes with business and valuations experience recognized in Eric Jordan’s 5 Position Papers and 25 Factors Affecting Business Valuation)
5. When dealing with the valuation of shares of closely-held corporations and of intangible assets, the effect
on value of a number of fundamental factors, such as the following, should be considered and analyzed: (a)
The nature of the business, and history of the business from its inception. Considered in History Factor (b)
The general outlook, the specific outlook and condition of the particular industry and the company's
position in the industry. Considered in all Position Papers (c) The balance sheet, the financial
condition and the capital structure of the particular company. Considered in Financials Factor (d)
The company's earnings record and its earnings power. Considered in Financials Factor (e) The dividend-paying
capacity of the specific company. Considered in Financials Factor and all position papers (f) The existence
of goodwill and/or other intangible assets. Considered in all of the position papers and most of the 25
Factors (g) Sales of the company's stock. Considered in Financials Factor (h) The size of the specific
shareholding to be valued. Considered in Purpose and Minority Interest Factors (i) The stock market prices
of comparable stocks of reasonably similar corporations in the same line of business, where these shares
are actively traded in an open, unrestricted and public market. Considered in Industry Benchmarks Factor
(j) The value of the corporate assets underlying the shares. Considered throughout the 5 Position Papers
and 25 Factors.
6. There are also numerous factors and issues relevant to the valuation of specific shareholdings, apart from the fundamental factors considered in valuing the enterprise as a whole. These include the existence of (a) options, other buy-sell agreements or other contractual rights or obligations; (b) control or minority shareholder interests; (c) the rights and privileges of the various classes of shares under the company's letters patent, bylaws, or memorandum of association; and (d) corporate-owned life insurance. Considered under Utility, Sustainability, and Scalability Factor.
WEIGHTING OF VARIOUS FACTORS
7. Depending on the nature of the corporation's business, certain of the relevant factors may be accorded greater weight. In some businesses, earnings may be the primary determinant of value, while in others it may be asset value. The valuator must consider a different combination of factors in each case in determining fair market value. Considered throughout the Position Papers and Factors
8. The earnings and asset value methods are the two most generally accepted bases for determining value.
The earnings method is of primary concern when valuing shares of operating companies that manufacture
or market products or services. Eric Jordan’s 5 Position Papers and 25 Factors considerations are
weighted more heavily on intangible assets that from 2020 forward make up to 90% of the value of
S&P 500 companies.
9. Asset value methods are useful where: (a) A reasonable and viable alternative to buying an existing business is to start one from scratch, such as small construction subcontractors operating on competitive bids, auto body repair shops, machine shops, some retail outlets. (b) A business sells largely on an asset basis, that is, it derives its income largely from the assets, either tangible or intangible, rather than from the personal efforts of the owners and personnel, e.g., real estate holding companies, equipment leasing or investment companies, franchise or dealership operations. Eric Jordan’s 5 Position Papers and 25 Factors considerations are weighted more heavily on intangible assets that from 2020 forward make up to 90% of the value of S&P 500 companies.
10. Generally speaking, the fair market value of a business is usually the greater of (a) its liquidation
value, and (b) its going concern value. Considered throughout.
11. The liquidation value approach is generally used where (a) the business is not a viable ongoing operation and is consequently suitable only for liquidation; (b) the business is a going concern, but its value is related to the liquidation value of the company's underlying assets; and (c) it is an aid in the determination of fair market value on a going concern basis, as in determining risk. Considered throughout.
12. The going concern value approach is normally used where the business is a continuing enterprise with the potential for earning a reasonable return on investment. Where there is adequate potential earning power in the form of economic future profits or discretionary cash flows, the determination of going concern value depends on the amount and quality of the earnings or cash flows, and the business and financial risk that these earnings or cash flows can be achieved and sustained. Considered throughout.
FACTORS IN CAPITALIZATION RATE SELECTION
13. The risk, expressed in a going concern value calculation as the capitalization rate, relates to a number
of factors in the business, among which may be: (a) The tangible asset backing. (b) The liquidation value.
(c) The nature and history of the business operations. (d) The general economic, money and stock market
conditions and outlook. (e) Specific industry and market comparisons. (f) The financial condition of the
specific business being valued. (g) The quality of the business operations, including such factors as its
management depth, its marketing, research and development capabilities, the composition of its labour force
and product mix, and the existence of major contracts. (h) The impact of inflation and foreign exchange
fluctuations. (i) The specific risk as related to the stability or irregularity of the maintainable level
of earnings or cash flows of the particular business. (j) The general and specific political environment.
(k) Opportunities for growth as related to the social environment of the business. (l) The existence and
importance of competitors. (m) The cost or ease of entry into the particular industry being reviewed. (n)
The choice of and rates of return on alternate investments.
It should be noted that the foregoing list is not exhaustive.
The valuator must exercise judgment in determining the extent to which these and other potential external and internal factors are relevant in the quantification of a capitalization rate. All of this is considered in the 5 Position Papers and 25 Factors Affecting Business Valuation.
14. The general approach, appropriate methods and relevant factors are applicable to the determination of fair market value of any type of business interest, incorporated or unincorporated and of intangible assets, for income tax purposes. Yes, considered throughout.
15. The organization of the departmental business equity valuation function is outlined in the current
version of Information Circular 72-25.
16. The Regional Valuation Officer may ask for documents, statements or other information, including the following: (a) Details and the basis of values filed, for Valuation Day or any other dates. (b) A balance sheet with supporting statements, schedules and notes as at the date of valuation. (c) Copies of any appraisals of the fixed assets and/or real estate. (d) Financial statements for the five most recent fiscal periods prior to the valuation date, or since the commencement of operations, whichever represents the shorter period. (e) If the business has been operating for five years or less, the financial statements should include an opening balance sheet. (f) Copies of all option, buy-sell or other shareholder agreements or partnership agreements. (g) Complete details of all acquisitions and dispositions of the taxpayer's interest in the entity, proposed or completed. (h) Copies of any arm's length offers for substantially all of either the company's shares or its fixed assets. (i) For small closely-held companies, a list of shareholders outlining the number of shares held and any family relationships. (j) For large closely-held companies and public companies, a list of major shareholders, outlining the number of shares held and any family relationships, if applicable. (k) For partnerships, a list of the partners outlining their profit and capital-sharing ratios. (l) If the property is a bond or other obligation, details of the series, face value, interest rate and maturity date. (m) Copies of extracts from the corporate letters patent, memorandum of association, or by-laws detailing the rights and privileges attaching to all classes of shares. (n) With regard to companies, details of any recent sales of similar securities. (o) A brief history of the business operation, including the area it serves, its relation to its competitors in the same industry, and the specific outlook and condition of the particular industry. (p) Any pertinent facts or opinions concerning such issues as the dependence of the company on key personnel, suppliers or customers, the taxpayer's role in the company, the company's potential for growth, the adequacy of its facilities, and the existence of contracts or leases. (q) Details of life insurance policies owned by a corporation or partnership on the lives of its key personnel. (r) Details of and comments on the adequacy of salaries and/or other benefits paid or credited to the principal shareholders, partners or proprietor and their families.
It should be noted that the foregoing list is not exhaustive. This is understood and considered.
OPTIONS AND BUY-SELL AGREEMENTS
17. Options and buy-sell agreements affect fair market value determination as required by several sections of
the Income Tax Act, notably section 69 and subsection 70(5). Considered under Shareholder Agreement Factor
in a private company valuation.
18. In a closely-held corporation, fair market value must be determined by referring to share rights and restrictions, whether found in the company's articles, by-laws or valid contracts between shareholders. These rights or restrictions can have an appreciatory or a depreciatory effect on the price a willing purchaser would pay for the shares in the notional market. Considered under Shareholder Agreement Factor in a private company valuation.
19. Where these rights cannot be changed without incurring the possibility of minority shareholder court or breach of contract action, where such rights limit the amount that can be realized at the date of valuation and require the shares to be disposed of for a stipulated amount, their value must be determined according to the provisions of such agreement or article. In these circumstances, other relevant factors normally considered in valuing shares may not be relevant. Considered under Shareholder Agreement Factor in a private company valuation.
20. On the other hand, where a majority shareholder holds shares subject to rights and restrictions and can modify these same rights and restrictions without incurring the possibility of adverse minority action, the value of these shares should not be restricted to the amount prescribed by the terms of the arrangement. Considered under Shareholder Agreement Factor in a private company valuation.
21. It must be noted that an arrangement that restricts the value of the shares subject to it must be bona fide in nature. That is, there must be some primary legitimate business purpose, such as the orderly succession of management, control over the influx of outsiders and creation of an outside market for the shares. Considered under Shareholder Agreement Factor in a private company valuation.
22. In addition, for the provisions of any arrangement to be considered relevant to the valuation of shares, the contractual agreement must be validly constituted and binding (i.e., a legally enforceable arrangement), and there must be a reasonable estimate of fair market value made.
Considered under Shareholder Agreement Factor in a private company valuation.
23. The following two types of restrictions will not render the agreement determinative of fair market value:
(a) Where a restriction on transfer is one only of consent by shareholders and/or directors, which does not stipulate a price at which shares can be transferred or does not specify events under which an obligation to transfer or option to purchase shares arises, it will not be determinative of fair market value. However, the restriction may be a depreciatory factor to consider in valuing the shares subject to the arrangement. (b) Where a restriction is merely a right of first refusal at a stipulated price, it will not be determinative of fair market value, although it may be another depreciatory factor to consider. Considered under Shareholder Agreement Factor in a private company valuation.
24. In the situation where shares are subject to a bona fide commercial option at a specified or formula price at the time of valuation, the option price will likely represent the lowest (or "floor") price which a prospective and willing purchaser would pay and a willing vendor would accept. To be a bona fide commercial option, it must be a legally enforceable contract with a legitimate business purpose. Such an option would have a depreciatory effect on the fair market value of the shares. Considered under Shareholder Agreement Factor in a private company valuation.
25. The facts of a case would determine what amount, if any, a purchaser would pay in excess of that "floor" price and would depend on a number of factors including, when the option is exercisable; the likelihood that the option will be exercised; whether the option price is fixed, subject to periodic increases, or based on a formula which affects an increase in price as the company succeeds; and, the size of the particular shareholding. Considered under Shareholder Agreement Factor in a private company valuation.
26. An agreement may provide for a number of inter vivos events which will give rise to either an optional or a mandatory sale at a specific price, such as retirement, resignation, or disability. Such restrictions may have a depreciatory effect on share value. Where the terms of the agreement stipulate a mandatory sale when the shareholder wants to sell his shares, the price stipulated in the agreement should accordingly limit the value pursuant to subsection 70(5), because a prospective purchaser would not be willing to pay any more for the shares than he/she would be able to receive under the provisions of the agreement. Considered under Shareholder Agreement Factor in a private company valuation.
27. If the restrictions contained in agreements are not considered determinative of fair market value, normal valuation approaches will be used to determine the fair market value of the shares in question. Considered under Shareholder Agreement Factor in a private company valuation.
28. In order for a buy-sell agreement to be considered determinative of value pursuant to subsection 70(5), it must meet all the following requirements: (a) The agreement must obligate the estate to sell the shares at death either under a mandatory sales and purchase agreement or at the option of a designated purchaser. (b) The agreement must restrict the shareholder's right to dispose of his/her shares at any price during his/her lifetime. (c) The agreement must fix a price for the shares or set out a method for determining the price on a current basis. (d) The agreement must represent a bona fide business arrangement and not a device to pass the decedent's shares to his/her heirs for less than an adequate and full consideration. Considered under Shareholder Agreement Factor in a private company valuation.
29. If a buy-sell agreement, normally determinative of value, is executed between parties not acting at arm's length, its provisions should be determinative of value, as long as it meets the following criteria: (a) It is a bona fide business arrangement. (b) The stipulated price or formula price in the agreement provides full and adequate consideration, and represents the fair market value of shares determined without reference to the agreement at the time it is executed. (c) It is a legal and binding contract. Considered under Shareholder Agreement Factor in a private company valuation.
30. In order for an agreement to be considered bona fide, there must be no donative intent in the agreement. In other words, while the parties to the agreement may be related, they must transact as they would at arm's length with strangers. Considered under Shareholder Agreement Factor in a private company valuation.
31. Each case will be dealt with on the basis of the related facts. These facts will determine whether a specific buy-sell or option agreement is legally enforceable and whether its provisions should be determinative of value or should be some of the many relevant factors to be considered in arriving at fair market value of the shares subject to the agreement, in accordance with generally accepted valuation principles. Considered under Shareholder Agreement Factor in a private company valuation.
Reference should also be made to the current version of IT-140.
FAMILY AND GROUP CONTROL
32. The Department recognizes that in certain situations either a related group or an unrelated group of
shareholders may control a corporation if they owned amongst themselves at least 50% + 1 of the issued
and outstanding voting shares of the corporation at the same time and if they have historically acted
in concert as a group. It is a rebuttable presumption that a family group has acted in concert to control
a corporation. Considered under Shareholder Agreement Factor in a private company valuation.
An assertion by a minority shareholder that he/she is part of a family control group must be considered in light of all relevant factors, including the rights and restrictions attributable to his/she particular shares. Considered under Shareholder Agreement and Minority Interest Factor in a private company valuation.
In a situation where the existence of family control is recognized, the Department will employ a rateable valuation for each family group member's shares. Considered under Shareholder Agreement Factor in a private company valuation.
33. An assertion of group control by family members, such as those referred to in subsection 251(6) of the Income Tax Act, will be accepted, provided there is no contrary evidence that they did not act in concert. Groups of relatives other than those referred to in subsection 251(6), must provide proof that they were part of a controlling family group and acted in concert with that group. Considered under Shareholder Agreement Factor in a private company valuation.
34. With regard to control by a group of shareholders dealing at arm's length, the criteria necessary for acceptance of claims of group control will include (a) a written agreement under which all the shareholders in the group relinquish their rights to vote and to sell their shares independently at all times; or (b) provision in the corporate letters patent, memorandum of association or the bylaws restricting individual rights to vote and to sell their shares independently at all times; or (c) permanent release of the individual shareholder's rights by giving of an irrevocable proxy to a designated person to vote and to sell the shares as he/she sees fit on behalf of all the shareholders in the group; or (d) a pattern of conduct to demonstrate that the shareholders acted collusively in all matters relating to the control of the corporation. Considered under Shareholder Agreement Factor in a private company valuation.
35. In order to determine whether a certain pattern of conduct is indicative of collusive action in all matters relating to control, the following actions may be undertaken individually or in any combination: (a) Shareholders' and directors' minutes may be examined to determine the extent of consultation among the group. (b) A review of remuneration may be made to insure that all members of the group were treated fairly. (c) Interviews with members of the group may be held to determine the role played by each member. (d) Details of actual purchases and/or sales made by the claimants may be examined. Considered under Shareholder Agreement Factor in a private company valuation.
36. Where the Department is satisfied that the documentation provided indicates a consistent pattern of group control, it will apply a rateable valuation for each member's shares, and not apply a minority discount. Considered under Shareholder Agreement and Minority Interest Factors in a private company valuation.
37. The Department also recognizes that effective control can exist in a public corporation where an individual or group has a large block of shares, where through unconditional proxies, a majority of votes at any shareholders' meeting controls management and where the remaining shares are widely dispersed. In these cases, satisfactory evidence of control must be provided.
Each case will be dealt with on its own merits. Considered under Shareholder Agreement Factor in a private company valuation.
STOCK OPTION BENEFITS
38. The Department's policy concerning benefits received by employees under stock option plans pursuant to
section 7 of the Income Tax Act revolves around a few key words contained therein.
With regard to the phrase "value of the shares" encountered in paragraph 7(1)(a), the Department generally interprets the term "value" to mean fair market value, as defined previously. Agreed and considered throughout.
39. For purposes of determining the date upon which the corporation's shares are "acquired" pursuant to paragraph 7(1)(a), the Department considers that to be the date at which the taxpayer acquires the rights of a shareholder with regard to the purchased shares subject to the option.
The factual circumstances of each case will determine the date at which a taxpayer obtains legal ownership or the incidence of legal ownership in and to the shares subscribed, and thereby acquires the shares. Considered in Purpose Factor and Effective Date of Valuation.
Reference should also be made to the current version of IT-113.
CORPORATE-OWNED LIFE INSURANCE
40. According to subsection 70(5.3), in determining the subsection 70(5) value of a deceased's shares
(for deaths occurring after December 1, 1982), the value of corporate owned life insurance is its cash
surrender value. This applies to the deceased, but where there are two or more shareholders and
corporate-owned life insurance is required to fund a stock purchase agreement, one must determine
the value of the policies held by the corporation on the other shareholders.
The factors to be considered in determining the value of such policies held on the lives of shareholders other than the deceased, should include: (a) cash surrender value; (b) the policy's loan value; (c) face value; (d) the state of health of the insured and his/her life expectancy; (e) conversion privileges; (f) other policy terms, such as term riders, double indemnity provisions; and (g) replacement value. Considered under Shareholder Agreement Factor in a private company valuation.
Reference should also be made to the current version of IT-416.
41. If the death of one of the shareholders for which corporate life insurance is owned is considered "imminent" and it is proper to consider this factor in valuing a policy, the value may be greater than the policy's cash surrender value. However, one must also consider the following factors: (a) the possibility that the insured will recover and not die; (b) the effect that the loss of a key person would have on the business operations; (c) whether the share interest being valued represents a majority or minority of the outstanding shares; and (d) the importance attached to factors other than asset value in the circumstances, such as the future earnings expectations and the prospects for dividends. Considered under Shareholder Agreement Factor in a private company valuation.
Income Tax Act Policy: Source direct link without my notes.
Experience Generated Methodology for Small Business Valuation Purposes
Intangible assets are the tools of wealth creation for the future. (valued “en bloc”, on the effective date of valuation) as required by the Income Tax Act and the "Policy Statement on Business Equity Valuations," From Canada Revenue Agency, No: 89-3, Date: August 25. 1989. (Modified 2002-08-27)
Relevant Experience Is Key.
Almost everyone agrees that the intangibles are the drivers for businesses large and small. Correlating the Normalized Net Income to the huge intangible asset value that drives the business must be done.
We accomplished this by using relevant, long term business ownership and operation experience to measure the factors, to find their importance to the overall business, and assign an individual weight. This is why relevant experience is necessary to value intangible assets. Furthermore, we believe it would be almost impossible for someone to do this without relevant business owner experience.
In our experience of producing in the range of 20 business valuations for CRA purposes which to the best of our knowledge were all accepted and not challenged by CRA; additionally, in at least 200 other business valuations, we found that there were no circumstances where scores lower than minus 5 or higher than plus 10 existed. For efficiency, we therefore chose to use the scale of -5 to +10 in our determinations. We remind readers again of the court ruling on April 7, 2017, court file number 1601-15411 where the client won using my valuation and methodology.
We believe an advanced methodology like this has not been developed within the International Valuation Standards Council and their business valuation organizational membership of 180 member organizations across 137 countries; because their membership is almost 100% accountants who lack long term entrepreneurial and relevant business owner operator experience needed for valuing small businesses.
IVSC has 6 prominent Canadians on the board and the largest business valuation group in Canada is a leading VPO member. These groups try to use precedent or “stare decisis” status to block advanced methodologies to the detriment of clients, courts, the economy, and the industry.
What we have created is new to the small business valuation industry but not likely new to Venture Capitalists who have some methodology to understand intangible asset value.