Almost everyone writing about business valuation is also trying to sell you one. That is not a criticism — it is an expensive, skilled piece of work and the market bids accordingly. But it does mean almost nothing written about business valuation is aimed at you, the person who has to commission the expensive valuation and then live with the number.
That person is usually the buyer. And the number they get back will set the price they pay, shape what a lender is willing to advance, and reappear months later inside the purchase agreement’s adjustment mechanics. A valuation scoped carelessly is expensive twice: once when you pay for it, and again when it turns out not to answer the question the deal actually asks.
While we do not perform valuations, we’re very familiar with how valuations can positively or negatively impact a deal. This is the reason that we decided to write this guide on business valuations.
Why this one number carries so much weight
The valuation is not just an opinion on what a business is worth. It is the input almost every other decision runs off. Your offer price comes from it. Your financing package is sized against it, because a lender will test your number before advancing anything. And once you are in a purchase agreement, the valuation’s assumptions are what the price adjustment and any earnout are measured against.
If you get the valuation wrong at the outset, the issues you face will often grow as the deal progresses. Buyers rarely discover a valuation problem while reading the valuation report — they discover it when the bank declines, or when a post-closing adjustment produces a figure nobody expected.
The three approaches, and when each one flatters somebody
BDC sets out the standard toolkit. Professional valuators, it says, “typically use a mix of three methods to confirm the value of a business: 1. Income-based approach calculating a multiple of EBITDA 2. Assets-based approach calculating the value of tangible and intangible assets 3. Market-based approach checking what comparable companies sold for.”
What is worth understanding as a buyer is that the three do not produce the same answer, and the choice between them is itself a negotiating position:
| Approach | Best suited to | Watch for |
|---|---|---|
| Income (EBITDA multiple) | profitable businesses whose value exceeds their net assets | which normalizations were made to EBITDA, and who chose the multiple |
| Asset-based | asset-heavy businesses, or ones being wound down | intangibles valued optimistically; assets that are leased, not owned |
| Market comparables | sectors with genuine transaction data | how comparable the “comparables” really are, and how old they are |
A seller with strong earnings will prefer the income approach. A seller with weak earnings and a warehouse full of equipment will prefer the asset approach. Neither is dishonest. But if the report you are handed uses one method and barely tests the others, you are essentially looking at an argument, not an assessment.
What to specify before the work starts
Most of the value in a valuation engagement is decided before anyone opens a spreadsheet. You can settle these six things in writing at the outset:
- The level of report. A high-level calculation and a comprehensive report are different products at different prices, and a lender or a court will not treat them the same way.
- The as-at date. Value is a snapshot. If the date drifts away from your expected closing, you will be negotiating against a stale number.
- The standard of value. Fair market value is not the same as investment value — the latter accounts for what the business is worth to you specifically, including savings you can capture that another buyer could not.
- Who may rely on it. If your lender needs to rely on the report, they must usually be named as an addressee. Retrofitting that later often means paying for a reissue.
- What normalizations are in scope. Owner compensation, related-party rent and one-time expenses all move EBITDA. Ask to see the adjustments listed, not just the result.
- Whether the valuator will support the number afterwards. If the price is later disputed, an expert who cannot or will not stand behind their report is of limited use.
Here is the practical version. Before you sign the engagement letter, put those six items into an email and send it to the valuator as questions. You are not being difficult, and a good valuator will answer all six without blinking. Watch the replies to the as-at date and to who may rely on the report in particular, because those are the two that cost real money to change afterwards. If an answer comes back vague, you have found the problem while it is still free to fix.
BDC recommends engaging someone holding the Chartered Business Valuator designation, “administered by the Canadian Institute of Chartered Business Valuators”, noting it helps both sides “avoid disagreements about the valuation or the risk of duelling valuations.”
A valuation is not the price
This is the part buyers most often misread. A valuation tells you what a business is worth on a defined basis at a defined date. It does not tell you what you will pay for the business.
BDC puts it directly: “the price you finally settle on may differ from both the bank’s figure and the appraised market valuation.” Competing bidders are what control the price. A seller in a hurry may also move the price downwards. Other factors may include how well the business fits with any other businesses that you own.
It’s best to treat the valuation as the floor of your reasoning, not the end of it. While it may tell you when to walk away, it does not tell you what to offer the seller. That distinction sits alongside the break-even and return-on-investment work you should be doing in parallel.
Where this becomes a legal question
Everything above is a business question. That changes once your number goes into the purchase agreement, because the agreement uses the valuation’s assumptions to work out real money that changes hands after closing.
The number and its assumptions are what the working capital adjustment gets measured against. If the report normalizes EBITDA in a way the agreement’s definitions do not match, the post-closing true-up will produce a figure neither side expected. If there is an earnout, the earnout formula usually leans on the same accounting treatment the valuator adopted — and if those two documents were drafted by people who never spoke, that gap is where the dispute starts.
There is also a reliance problem. A report scoped as an informal calculation, addressed only to you, may not support a claim against a seller whose representations turn out to be wrong. The time to fix that is when the engagement letter is signed, not when the claim arises.
So: get the valuation early, scope it deliberately, and have it read against the draft agreement rather than filed once the price is agreed. If you are working through an acquisition, our guide to buying an existing business sets out where this sits in the wider process.
If you would like the valuation and the agreement reviewed together before you commit, schedule a complimentary discovery call with our firm, or reach the office at 416-580-0345.
This article is general business and legal information, not advice for your specific situation. How a valuation should be scoped, and how it interacts with your purchase agreement, depends on facts this article cannot know. Speak with a lawyer about your own transaction before you sign a letter of intent.
