CBVs and Legal Matters

In this article, we discuss some of the ways a Chartered Business Valuator (CBV) is often asked to assist in various legal matters.

CBVs and Litigation

In litigation, CBVs are often involved as either independent “expert witnesses” or non-independent litigation consultants.

Expert Witnesses
  • An expert witness is an opinion witness of the court. An opinion witness does not have direct involvement in the matter that is before the proceeding until after the incident occurred, and is relied on to provide an opinion on the matter based on their specific expertise. This is different from a fact witness, which is a person who has direct involvement in the matter.
  • An expert is a person with specialized skills, knowledge, experience, or training in a specific subject matter area that is pertinent to the legal proceeding. To be an expert witness, the expert must be clear of any conflicts.
  • Prior to becoming an expert witness, the expert prepares an expert report to be used as evidence in litigation. Experts must be accepted by the court and qualified as an expert witness at the time of trial to testify in a proceeding related to matters of their specific expertise.
  • An expert witness must be independent and objective, and it is their duty to assist the court impartially on matters relevant to their area of expertise.
CBVs as Expert Witnesses

CBVs are regularly relied on in legal proceedings to assist in the following areas:

  • Disputes where a business valuation is required;
  • Dispute-related matters such as shareholder, intellectual property, contract, and matrimonial disputes;
  • Quantification of economic/ financial losses; or
  • Other conclusions of a financial nature.

A CBV may be asked to prepare an independent written report, which will be entered as an exhibit in litigation. This report is known as an “expert report”, which is a written communication containing a conclusion as to the quantum of financial loss, or any conclusion of a financial nature in the context of litigation or a dispute, prepared by an expert acting independently. In situations where the fair market value of a business or asset/liability is required, an expert report may contain a valuation conclusion.

A CBV may also prepare a limited critique report, which has the purpose of commenting on another expert’s report but does not include a separate financial conclusion. In a limited critique report, comments are provided with respect to the approach and techniques used and calculations in the original report, subjective matters such as the selection of discount rates, and whether the original report is suitable for the purpose at hand.

CBVs as Litigation Consultants

A CBV can also assist clients in litigation matters as a litigation consultant. In this case, the CBV will act as an advisor to legal counsel to promote the interests of their client. In this situation, a CBV is not considered independent, and would not be able to act as an independent expert witness during the trial or in other future litigation on this matter. In this role, a CBV generally acts as an advisor to legal counsel, will provide advice, support their client in various processes, and may advocate on their client’s behalf. Because certain valuation principles and topics are often subject to interpretation and professional judgment, the consultant is often relied on to assist the client to advance their own position in the litigation process. The litigation consultant can assist with such issues as strategy and cross-examination. A CBV acting as a litigation consultant is not independent and will not be required to testify. In some situations where a CBV is engaged as a litigation consultant, the CBV may be covered by litigation privilege.

CBVs and Family Law

CBVs are regularly involved in family law matters. CBVs are most often involved in assisting in valuation determinations related to the division of property on marriage breakdown and the determination of income for spousal or child support purposes.

If you have any questions regarding how a CBV can assist you in legal matters, please contact a member of our Financial Services Advisory Team (FSAT) team.

NOTE: This article is not intended to be legal advice. Please contact a lawyer to discuss the legal implications discussed in this article further.

Minority Shareholdings – Does a
Minority Discount Apply?

Who are minority shareholders?

A minority shareholder is any shareholder who does not own a controlling interest in a public or privately-held company.

What is a minority discount?

In a notional valuation context, a minority discount is when the pro rata value of a particular minority shareholding is reduced to reflect the disadvantages of owning a minority interest of an asset or security
as a whole. Typically, a minority shareholding realizes a discount for:

  • The inherent lack of marketability or illiquidity, which refers to assets or securities that cannot be sold and converted to cash without a loss in value. Minority shareholdings are generally viewed as less marketable or liquid than a controlling interest, therefore attracting fewer potential buyers resulting in a discount. Sometimes referred to as Discount for Lack of Marketability or DLOM; and
  • The lack of control over the company’s operations and the ability to influence the future direction of the company and the distribution of profits/dividends. Sometimes referred to as Discount for Lack of Control or DLOC.

The level of minority discount can range significantly depending on the facts of the particular situation and ownership interest held.

Minority shareholders in a publicly traded company vs. a privately-held company

Minority shares in a publicly traded

company, where shares are widely held and large volumes of share are frequently traded, usually has a minimal illiquidity discount. While minority shareholders have no control over the direction of the public company, they can choose whether to sell or hold the company’s shares. As a result, there is often no significant discount for illiquidity or lack of control.

In contrast, a privately-held company’s en bloc value may already reflect a general illiquidity discount as there is no ready market available to buy or sell shares in a privately-held company. A further discount for

illiquidity may apply specifically to a minority shareholder, compared to a controlling shareholder of the same privately-held company.

Factors influencing discount

While the specific methods and possible empirical evidence are outside of the scope of this article, the quantum of the discount for lack of control and lack of marketability, which are sometimes combined into one discount, is dependent on several factors, including the following factors:

  • Shareholder’s level of involvement in the business.
  • A shareholder who is on the board of directors or involved in the daily operations of the business would generally have a lower quantum of discount than a shareholder who has no involvement in the business operations or governance.
  • Relationship and size of the shareholding relative to the other shareholdings.
  • In scenarios where there are no controlling shareholder, the relationship and combination of the size of the subject shareholding with other minority shareholders must be considered to determine if the subject shareholder can influence decisions.
  • Additionally, the applicable minority discount may be less or a potential premium may be available, if the other minority shareholders want to purchase the subject’s shares in order to become a majority shareholder.

Shareholders’ agreements

  • Clauses that influence liquidity or control will have influence on the quantum of a discount, such as restrictions on share transfer, rights of first refusal, or tag-along/drag-along provisions.

Nuisance value

  • Shareholders who hold just enough shareholdings to prevent or delay the plans of a controlling shareholder are considered to have “nuisance value” and may have a lower quantum of discount.
  • It is difficult to determine the discount for nuisance value in a notional valuation.

Family or group control

  • Shareholders who act in concert and in aggregate owns over 50% of the shares, may not have an applicable minority discount. However, a third party who enters into a shareholder agreement may have a significant minority discount applied to the value of their shares.


  • A history of dividend distribution is an indication of return on investment and may indicate less of a minority discount.

Prior sales of minority shareholdings

  • Prior transactions provide insight regarding the quantum of any minority discount.
To apply a minority discount or not?

To determine whether a minority discount applies, consider the following two factors: the purpose of the valuation and the valuator’s professional judgment. If the valuation were to determine the value of the minority’s interest for the purpose of a sale to a non-related party, a minority discount would apply. The quantum of the discount that applies to the sale requires a valuator’s professional judgment and analysis.

In shareholder disputes involving oppression, one of the remedies is to have the corporation purchase the oppressed minority shareholder’s interest at fair value. In this case, a minority discount would not apply.If you have any questions or require assistance with determining if a minority discount is applicable and the quantum of the discount, please contact a member of our Financial Services Advisory Team (FSAT) team.

How Should Redundant Assets be Treated in a Business Valuation?

Assets owned by an operating company can be divided into three broad categories in a business valuation:

  1. Tangible assets (i.e., assets that have a physical substance) required for day-to-day operations of the business;
  2. Goodwill and intangible assets such as patents, tradenames/ brands, or customer lists which do not appear on the balance sheet unless they have been acquired in a transaction; and
  3. Redundant assets which are typically physical assets not required by a business for ongoing operations.

In a business valuation, tangible assets, goodwill, and intangible assets usually form part of the going concern value, which is the value of a business enterprise that is expected to continue to operate into the future.

However, redundant assets do not form part of the going concern value as they are not required for operations. A potential buyer considering purchasing a business would only be interested in purchasing the assets that are used by the business to generate operating income. Therefore, redundant assets are not included in the value of the business operations. Instead, the value of redundant assets are added in addition to the value of the business operations to determine the fair market value of the en bloc share value or equity value of the business.

Examples of typical redundant assets:

  • Excess working capital
  • Marketable securities
  • Due from shareholder/related companies
  • Personal assets (i.e., artwork, vehicles, etc.)
  • Real estate
  • Life insurance policies

Redundant liabilities

Redundant assets increase the en bloc share value of the corporation. Conversely, redundant liabilities are items that reduce the en bloc share value of the corporate and can include non-operating loans such as loans to purchase a personal vehicle or due to shareholders/related parties. Identifying redundant assets or liabilities In some situations items that are typically redundant assets may actually be required for operations of the business depending on the nature of the business and its operations. For example, a life insurance policy which is needed as part of a loan covenant/ external lending requirement. As a result, the particular life insurance policy may not be considered redundant.

Real estate as a redundant asset

Generally, when a company does not directly rely on its real estate (i.e., land and building) to generate its revenue, real estate is often considered redundant. However, consideration must be given to the business industry and availability of rental space for operations, among other factors.

In a notional business valuation situation, businesses with real estate typically engage the services of a professional real estate appraiser to determine the fair market value of the property. In addition, when assessing the value of a business using the income approach, an adjustment to normalized cash flow should be made for the amount that would need to be paid if the operating space was rented at market rates from a third party.

Excess working capital

Working capital, (i.e., accounts receivable, prepaid expenses, inventory, less accounts payable) is the amount required to keep operations running and meet short-term daily obligations. If a business does not have sufficient working capital, it may require additional funding/investment to operate. Therefore determining the required level of normal working capital is essential and involves a review of the business, industry ratios, and banking covenants.

Once a required level of working capital is identified, any excess working capital is deemed redundant and removed from the business. During a sale of a business, if there is a deficiency in working capital, a reduction to the transaction price will be made to retain cash in the business. Working capital considerations are discussed in greater depth in our Fall 2022 FSAT Newsletter.

Tax consequences

In a disposal of redundant assets (often during an asset purchase of a business), disposal cost and tax consequences need to be considered such as taxable capital gains/losses, recapture/terminal loss, and income taxes. When a notional business valuation is prepared, the tax consequences are also considered, but may require some discount to account for the fact that the redundant assets will likely be sold at some point in the future, and not at the valuation date.


Proper identification of redundant assets/liabilities and determining an appropriate level of working capital are some important factors in determining an accurate value of a business.

If you would like more information on the topic or assistance in determining the value of your business, please contact our valuation specialists.


Work in Process (WIP) Valuation Strategies

In many industries – and especially in construction – the method by which a company chooses to value its work in process and consequently recognize revenue on projects can have a large impact on the timing of the related tax that it owes. It can also significantly impact the value of the company at a given point in time and its standing in relation to any debt covenants that the company may have. Identifying the optimal accounting method to report income and expenses is not always an easy task and making the incorrect choice can negatively impact your business.

In some cases, it is simple to determine the timing for when revenues are earned. That is, once ownership of a product is transferred or a service is complete, revenue is considered to have been earned. If your projects are relatively short in nature, waiting till the contract is complete to recognize the revenue (known as the Completed Contract Method) may be the appropriate option.

However, if you have a longer term project, delaying the recognition of revenue until the end of the contract could cause problems, for example, tying the direct cost of the project to the revenue it relates to.  The solution to this problem is often the Percentage of Completion method of revenue recognition.

Completed Contract Method

Under the Completed Contract Method, revenue is recognized when the sale of goods or the provision of services is complete or substantially complete. This method is appropriate when the performance of a contract consists of the execution of a single act or when company’s management cannot reasonably estimate the extent of progress toward completion of the contract.

Since most construction contracts involve the execution of many acts by a contractor, the Completed Contract Method is not appropriate in many circumstances. It is likely only in exceptional circumstances that the stage of completion of a contract cannot be reasonably estimated. Nonetheless, some smaller contractors have adopted this method for the following reasons:

  • It is simple and it is easy to determine when a contract is virtually complete;
  • There is no need to estimate costs to complete a project (i.e. costs are all known when the profit is booked); and
  • Assuming that the contractor is profitable, the income tax is deferred to the end of the contract.

As previously mentioned, depending on the type of contracts you have, your completion status at the end of the year and any other specific factors, this method may not be appropriate.

Percentage of Completion Method

The Percentage of Completion Method is generally the preferred method of revenue recognition for larger companies with longer term contracts.

This method matches revenue from the long-term contracts with their respective costs, calculating estimated revenue and gross profit at various stages of construction.

Calculating gross profit on individual jobs on a regular basis allows contractors to track their progress more accurately in these circumstances. This can also provide profitability benchmarks at key points in the year.  Having this information regularly can be helpful for planning purposes by avoiding surprises at the end of the year with respect to the amount of income being reported and also help to provide timely feedback to allow management to control costs and identify the most profitable types of jobs to pursue in the future.

Regardless of the method of revenue recognition being used or the type of projects you are undertaking, having a strong costing system in place to track the profitability of your jobs is very important. In addition, the ability to make accurate estimates with respect to items such as overhead cost allocations and stage of completion are equally important. Although these items can be very complex and specific to your business, refining these things can play an integral role in your company’s success.

The good news is that you don’t have to develop this alone, DJB’s Construction industry professionals can assist you with building a successful strategy for revenue recognition.

Role of an Expert

When a dispute or litigation arises the people involved will often need to seek the advice of several professionals. While their lawyers will often act as their advocates, other professionals are frequently retained as independent experts. Depending on the nature of the dispute, this type of expert may include psychologists or social workers, medical doctors, real estate appraisers, actuaries, Chartered Business Valuators (CBVs), forensic accountants and economic loss experts.

These experts are expected to assume an objective, neutral and independent role. In matters that proceed to court, the experts will be expected to serve as a neutral expert in order to assist the court. It is important for experts to maintain their independence not only in fact but also in appearance. If a judge believes that an expert has failed to maintain their independence and has assumed the role of an advocate on behalf of the party who hired them, they may either refuse to accept their report and testimony or, if accepted, give it less weight in their decision.

Several years ago, the courts expressed concern about the role of experts and what they felt was an increasing trend for some experts to assume the role of an advocate. This concern led to a requirement for any expert appearing in an Ontario court to sign a form in which they acknowledge that, regardless of which party hired them, they have duty to the court to provide an opinion that is fair, objective, non-partisan and related only to matters that are within their area of expertise. The expert also acknowledges they are required to assist the court and that these duties prevail over any duties or obligations to the party that hired them.

The issue regarding independence was highlighted in a recent court case (Plese v. Herjavec, 2018 ONSC 7749). This case was a matrimonial dispute in which CBVs were retained as independent experts. The judge was critical of the CBV’s retained by each party to value Mr. Herjavec’s business, stating:

“Both valuators signed the requisite acknowledgement of their duties as experts, namely to provide opinion evidence that is fair, objective and non-partisan. As was the case with the real estate appraisers, their opinions squarely align with the interests of the party who retained them. Again, I am astonished that there should be this kind of disparity between them. I wonder if their results would have been the same had they been retained by the other party. This case highlights in very stark fashion the continued problems with expert evidence. Notwithstanding the experts’ clear duties, they nevertheless end up supporting the position of the party who hired them. The changes to the expert rules, and the requirement for experts to acknowledge their duties of independence and impartiality were supposed to solve the problem of experts simply being ‘hired guns’. Sadly, the problem remains. I must therefore approach each expert’s opinion with a certain degree of caution and skepticism.”

When retaining an expert to assist you, it is important for the expert to maintain their independence and to provide a balanced, objective opinion. While it is natural for the party retaining the expert to want that expert to act as their advocate, doing so may ultimately be of limited use as that opinion may be rejected.

An alternative to the ‘traditional’ model of each party hiring their own experts, involves both parties jointly retaining a single expert. Where an expert is jointly retained, both parties are involved throughout the process, both provide their input and raise any questions they have with the jointly retained expert. In our experience, this approach often leads to a better exchange of information and is less costly than each party retaining separate experts. This approach is used extensively in matrimonial disputes for which the parties agree to and follow a collaborative model. Under the collaborative model, the parties agree to work with their lawyers outside of the court system and to jointly retain any experts that are required to assist them in the collaborative process.

DJB is frequently retained to act as independent experts both by an individual party and on a joint retainer basis. Please contact us if you wish to discuss our role and how we may be able to assist.


Working Capital in Business Transactions

Defining Working Capital

“Working capital” is the capital of a business which is used to fund day-to-day operations and meet shortterm obligations. In its most basic form, working capital is calculated as a business’ current assets, less its current liabilities.

However, in open market transactions and notional business valuations certain current assets and liabilities are often excluded when assessing the “operating” or net trade working capital of a business, such as cash, shareholder/related party loans, and other non-operational amounts. Cash is generally excluded from net trade working capital of privately held businesses unless the cash is used directly in the operations of the business, such as cash kept in cash registers in a retail business. This is because in most cases, the cash held in a business accumulates as a result of operations (i.e., through net income earned), and that cash is available to be either reinvested in the business or to be withdrawn by the owners, and is therefore not necessary in order to maintain the existing operations. In simple terms, net trade working capital is related to the operating activities of a business (excluding cash) such as accounts receivable, inventory, prepaid expenses, accounts payables, and accrued liabilities.

Calculating Working Capital

Determining which line items should be included in working capital may involve some judgment and is not always simple because the makeup of working capital can vary widely across different industries and even from business to business. This is why it is important to consider the specific nature of the operations of a business that impact how it employs working capital, as well as broader working capital issues that are common in the industry. Additionally, each component of working capital may need to be examined further to ensure all balances within the account are up-to-date, are operational and belong in working capital, and that the value reflected in the financial statements does not over or under-represent the asset or liability. Finally, the accounting standards used in the source financial statements should also be considered when calculating working capital, as balances on the balance sheet may be calculated differently depending on the accounting standards applied (i.e., GAAP, ASPE, IFRS).

Normalized Working Capital

In cases when the value of a business is determined based on its ability to generate future cash flows (i.e., using an income/earnings based methodology as opposed to an asset based methodology), the working capital that is required to operate the business is included in this value, and is not added to the value of the business. This is because the businesses requires the working capital to fund its continued operations and generate the level of income that this value is based. The amount of net trade working capital required to maintain ongoing operations is commonly referred to as the “normalized” net trade working capital amount.

Working Capital in a Business Sale

When a business is sold, it is common for the letter of intent between the buyer and seller to include general terms stating that the business will be sold with a sufficient level of working capital for the new owner to maintain operations. As the transaction advances, a specific amount of “target working capital” is usually agreed upon by both parties with corresponding definition on how the target working capital is to be calculated. This represents the amount that the buyer and seller agree is required to maintain operations, and that is expected to be left in the business at the time of closing. This target amount is based on an analysis of the company’s historical financial results, industry norms, ratio analysis, and benchmarks, and is ultimately determined through negotiations between the buyer and seller.

Working capital in a business at any one point in time is not always representative of the ongoing amount required. In some businesses and industries, the working capital required changes dramatically due to timing, such as large projects completed and invoiced, from month to month or year to year, such as businesses that experience seasonality or are in cyclical industries. For these types of businesses, it may be necessary to examine the average working capital requirement across different periods. Working capital balances may also be higher or lower than the required amount simply due to management’s own preferences. For these reasons, it is important to determine working capital requirements for a business on a normalized basis, which includes adjustments for seasonality or irregular changes that are not related to normal operations.

Implications on Price

When the amount of working capital left in the business on the day the sale of the business closes is different from the previously agreed upon target working capital amount, there is usually an adjustment made to the sale price to reflect this difference. In transactions where the actual working capital is less than the target, this negatively impacts the seller because the sale price is usually reduced by this amount. When the actual working capital is greater than the target, an increase to the sale price may be warranted. In a notional valuation context, a similar adjustment should also be considered if the working capital of the subject business is higher than or below what would be considered “normal” on the valuation date with a corresponding adjustment to the valuation conclusion of the shares.

The process for negotiating working capital in a business sale usually follows these broad steps:

  • A letter of intent is developed, outlining the broad terms agreed to by the buyer and seller. This usually includes an agreement that there will be a “normal” level of working capital in the business.
  • The buyer will analyze financial information about the business, which is supplied to them in order to better understand the working capital requirement of the business.
  • During the due diligence phase, both parties continue to analyze information about the business to determine any potential adjustments to working capital.
  • Through negotiations , b o t h parties will eventually come to an agreement on the “target working capital”.
  • A purchase agreement is drafted, and will further define how working capital is calculated and the target amount agreed to.
  • The  purchase agreement is finalized, and additional clauses may be added outlining a post-closing dispute resolution process (including working capital disputes).
  • Post-closing , the buyer will determine the actual working capital level that was in the business at close and further discussions may take place between the buyer and seller to determine any post-closing adjustments.
  • If necessary, the dispute resolution process is initiated as outlined in the purchase agreement to remedy any disputes between the buyer and seller.

At DJB, our team of specialists have the professional experience to assist business owners and prospective buyers throughout the transaction process. Our trusted professionals can assist in many aspects of business sales and purchases, including assessing the complex issues involved in determining the value of a business and analyzing its working capital requirements.

Considerations When Preparing Guideline Public Company Multiples for a Private Business

Among the approaches or methodologies employed by business valuators to determine the value of a business or equity interest is the market approach. The market approach determines the value of a business or equity interest using one or more methodologies that compare the subject business to similar assets, businesses, business ownership interests, and securities that have been sold or publicly traded. The advantages of using the market approach eliminates some subjective estimates and uses data that is readily available and verifiable. Two commonly applied methods under the market approach are the guideline public company method and the precedent transaction method. In this article, we will focus on the guideline public company method.

The guideline public company methodology is a useful tool in determining the value of a business or equity interest by comparing the subject company to similar companies that are publicly traded. This allows a private business to better understand the price it might receive if it was to trade publicly, based on public companies within a similar industry and similarly sized operations.

There are three steps to prepare a guideline public company comparison:

  1. Identifying a list of comparable publicly traded companies and calculating applicable valuation multiples. A valuation multiple is applied to a financial measure such as normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) to develop the value of a business;
  2. Adjusting the guideline public company multiples based on the relative size and risk of the comparable public companies in relation to the subject company; and
  3. Applying the selected multiples, after any adjustments, to the subject company/interest in order to determine its value.
Identifying comparable public companies and calculating valuation multiples

When identifying comparable public companies, it is important to consider the industry, operation size, location, risk, and diversity of revenue streams of the subject company. For each variable, consider the impact of relevant differences between the selected public comparable companies and the subject company. For example, classifying a restaurant into a full-service restaurant industry versus the fast-food limited service industry could result in different market multiples. Similarly, diversified companies are expected to have different market multiples compared to companies that engage in a specific line of business.

A common misconception is selecting more public companies, will result in a better analysis when the public companies may not be truly comparable to the subject company. Ideally, an average of a number or group of comparable public companies should be used for an accurate analysis.

Once a set of public comparable companies have been identified, valuation multiples are calculated using either the Enterprise Value or Equity Value. Both can be applied to earnings before interest and taxes (EBIT), EBITDA, revenue, or even nonfinancial measures. When calculating the valuation multiples, review the public company’s financial reports for one-time adjustments that may affect EBITDA or the selected measure. The most common valuation multiples use the Enterprise Value, being the “debtfree” approach. The Equity Value may be more relevant and reliable for equity valuations. See our Spring/ Summer 2022 issue of the FSAT News for an in-depth discussion on the differences between Enterprise Value and Equity Value.

Adjusting guideline public company multiples for comparability to private companies

Professional judgment is required to determine the potential discounts that is applicable to the subject company. For example, an inherent minority discount applicable to public traded companies may offset a liquidity discount that is applicable to smaller private companies. The following are common discounts to public company valuation multiples when valuing smaller private companies:

Liquidity discount: The amount by which the en bloc value of a business or ratable value of an interest therein is reduced in recognition of the expectation that the business or equity interest cannot be readily converted to cash.

Minority discount: The reduction from the pro rata portion of the en bloc value of the assets or ownership interests of a business as a whole to reflect the disadvantages of owning a minority shareholding.

Size discount: Large, diversified, and attractive businesses may have little or no discount, whereas smaller companies may have considerable discounts.

Applying selected valuation multiples

Finally, prior to applying the selected Enterprise or Equity Value multiples to the subject company, ensure the earnings of the subject company are “normalized” so they are representative of future maintainable earnings and are similar to the earning measure of the comparable public companies.

The market approach is often used as a secondary methodology or to assess the reasonability of a valuation conclusion. However, it can also be an informative first step if you are considering selling your business or adding a shareholder. To ensure you consider accurate guideline public comparable companies multiples for your business, one of our valuation specialists may be able to assist.

“Special Purchasers” and Their Impact on Fair Market Value

There are many instances when a formal business valuation is required regarding the fair market value of a business without exposing it for sale to the open market. For example, business valuations are often required when a business is not changing hands but the fair market value is still needed, such as for income tax and estate planning, family law matters, and for commercial litigation. When a business is valued without being placed for sale on the open market, the fair market value of the business is considered to be determined on a ‘notional’ basis. Since the business is not placed on the open market, Valuators must rely on theoretical principles, past experience, and their professional judgment in order to determine the fair market value a notional basis.

When assessing the fair market value of a business in a notional context, there are two components to value that are considered; the first is the “intrinsic” value of the business, which is the value that buyers will place on the stand-alone business assuming it will continue to operate as-is, and the second is any additional value above the intrinsic value that hypothetical buyers in the market would expect to receive as a result of integrating the acquired business into their existing operations and any other benefits they expect to receive as a result of the acquisition.

Special Purchasers

Buyers that are expected to realize additional value from an acquisition above the intrinsic value of an acquired business are referred to as “special purchasers”. A special purchaser is defined in Canadian business valuation theory as a purchaser “who can, or believes they can, enjoy post-acquisition synergies or strategic advantages by combining the acquired business interest with its own”. These special purchasers are willing to pay a premium for the business above its intrinsic value because they expect to benefit from these post-acquisition synergies, economies of scale, or strategic advantages that are a result of combining the acquired business with their own.


Special purchasers are often interested in acquiring a business in order to realize synergies. Synergies occur when the value of two combined entities is greater than the intrinsic value of each on their own, and typically arise as a result of new cost savings or increased revenues post-combination. Some examples of common synergies are increased purchasing power, reduced costs, lower debt interest rates, and increased diversification. It is generally difficult to determine the value of synergies when assessing the fair market value of a business. This is because each potential acquirer of a business typically has different types and amounts of synergies they expect to realize from an acquisition.

Economies of Scale

Economies of scale are cost advantages that a business receives as its operations grow and become more efficient. This can occur because when the volume of output of a business increases, the costs can be spread out over a larger amount of goods/services. When economies of scale exist, the value of the combined businesses to the purchaser is greater than the value of each business separately. In such cases, these buyers would be considered special purchasers since they would potentially be willing to pay more for the business than a buyer who is not able to take advantage of these economies of scale.

Strategic Advantages

Special purchases may also be motivated to purchase a business in order to receive greater strategic advantages. These buyers typically already own operating businesses in the same/similar industry, and are motivated to purchase other businesses in order to advance their strategic goals, such as eliminating a competitor, acquiring new technologies, or growing into a new geographic area. Often these special purchasers are competitors, suppliers, or clients of the subject business.

When Are Special Purchasers Considered?

In Canadian business valuation theory, the ”highest price” component of the fair market value definition mentioned earlier in this article is assumed to include the consideration of potential special purchasers, as these buyers are expected to offer a higher price for a business than non-special purchasers.

However, Canadian legal precedents generally dictate that when the notional fair market value of a business is required, consideration should only be given to special purchasers when such buyers are readily identifiable in the market and the price premiums they would be willing to pay can be reasonably estimated.

Even if it is believed that hypothetical buyers in a notional context may be able to realize synergies, economies of scale, or strategic advantages, it is often still difficult to determine to what level (if at all) these buyers would be willing to pay the seller for the additional value. For instance, in cases where only one special purchaser is thought to exist in the market, this special purchaser is not expected to pay a premium above the intrinsic value of a business for such benefits if they are the only buyer that could realize them. However, when multiple special purchasers exist, increased competition between these buyers to purchase the business and access these additional benefits is expected to result in the buyers offering more than the intrinsic value to acquire the business.

In such cases, valuators will examine the probability and number of special purchasers for a business that exist in the market, their ability and willingness to transact, and the estimated size of any premiums these special purchasers might pay. However, often the information available to valuators is not sufficient to determine with certainty the existence of special purchasers for a business and the size of any special purchaser premiums. It is also possible that the “special purchaser” premium warranted is already reflected in the calculated value if the calculations are based on multiples derived from actual market transactions which may already reflect industry-wide premiums. If this is the case, then no additional special purchaser premium should be considered.

A special purchaser premium is usually only considered in the notional fair market value of a business when these special purchasers in the market can be identified, and the additional value to each prospective buyer can be meaningfully quantified. When this is the case, it may be reasonable for valuators to attempt to determine the value of the business including the synergies, economies of scale, and strategic advantages that these market participants could reasonably be assumed to benefit from. However, this additional value is usually discounted to reflect the uncertainty of how much a special purchaser would pay for these additional benefits, and the risks associated with achieving them.

Acquiring a Business as a Special Purchaser

In addition to scenarios where the notional fair market value of a business is required, valuators may also be asked by potential special purchasers in a business acquisition to assist in quantifying the additional value that should be paid for the target business above its intrinsic value. In this case, valuators may attempt to determine the value of the synergies, economies of scale, and/or strategic advantages that will arise from the acquisition being considered. However, even if the additional value above the intrinsic value of the business can be reasonably determined it is often still difficult to determine to what extent the purchaser should pay for this additional value. Generally, when a business is purchased with the intent of realizing synergies, economies of scale, and/ or strategic advantages, the additional value paid for the business above its intrinsic value is determined as a result of negotiations between the buyer and seller.

If you are considering a sale transaction where a “Special Purchaser” may be involved, we can help guide you in the right direction.

Understanding “Enterprise Value”
and “Equity Value”

When business owners discuss valuations, they sometimes use the term “price.” However, there is an important distinction in business valuations between “value” and “price.” In business valuations, practitioners usually prepare a notional determination of “fair market value.” In addition, a notional determination of value is typically first approached on a “debt-free, cash-free” capital structure, with additional adjustments as discussed later in this article.

Fair market value is typically considered to represent the highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, each acting at arms-length in an open and unrestricted market, when neither is under compulsion to buy or to sell and when both have reasonable knowledge of relevant facts.1

When discussing business value with owners, one key area that is often misunderstood is the difference between the “enterprise value” and “equity value.” In order to understand the distinction between the two, it is important to consider the definition of fair market value above, and how it is calculated.

Most operating businesses are valued on a going concern basis, which means the business is assumed to continue to operate for the foreseeable future. This is because in most operating businesses, the value of the future economic benefit generated is greater than the value of the underlying assets employed in the business operations. When this is the case, the value of the overall business enterprise is greater than the value of its underlying assets and liabilities, and therefore a buyer would be willing to pay more to purchase the business altogether instead of the individual assets and liabilities separately.

One of the primary going-concern approaches to valuing a business is to employ a cash flow or earningsbased valuation methodology, which values the business based on its ability to generate future cash flows. Common cash flow-based valuation methodologies include applying a multiple to either the business’ sustainable level of cash flow or EBITDA (earnings before interest, taxes, depreciation, and amortization) when earnings are relatively stable, or when changes are expected through a discounted cash flow analysis, where annual future cash flows are discounted based on the risks related to the business, as well as the timing of when the results will be achieved.

What is Enterprise Value?

The above mentioned cash flow/earnings based valuation methodologies each result in the calculation of Enterprise Value, which is the total economic value attributable to the business enterprise, regardless of how it was financed (i.e., debt and cash) or its share structure. Enterprise Value is the “debt-free, cash-free” concept introduced earlier and can also be thought of as the value available to all debt providers, common shareholders, preferred shareholders, etc. Because Enterprise Value represents the business before financing and other discretionary amounts, it does not include the value of cash, non-operating assets or liabilities, or shareholder loans since they are not part of normal business operations.

What is Equity Value?

Equity Value is the value attributable to the shareholders’ equity of the business, including all preferred and common shareholders. In other words, is the value available after any payment to creditors and other non-equity stakeholders. The Equity Value of a business is determined by subtracting outstanding debt and other non-operating liabilities from the Enterprise Value of the business and adding any cash and redundant other non-operating assets.

The distinction between Enterprise Value and Equity Value is not always widely understood. Often, when a business is sold an initial offer is made on a cash-free and debt-free basis or Enterprise Value. In reality, at closing, any debt is deducted from the original price and the value of cash and other redundant assets may be added to come to a final price that is paid for the shares or Equity Value of the business. Another important consideration is the normal working capital requirements of the business, as the extent that there is too much or too little working capital in the business may lead to another significant adjustment. As a result, the working capital needs of the business should be carefully analyzed because this can be a dollar-for-dollar adjustment to the Equity Value, which we will discuss in detail in a subsequent article.

Implications for Business Owners

When discussing business value, owners may not appreciate some of the key differences between Enterprise Value and Equity Value. A common misunderstanding is related to the impact on Equity Value from shareholder/related party loans. Owners often move cash in and out of their corporations for risk management and other purposes. When a business begins, the owner or key investors will lend funds to the newly formed corporation in the form of a shareholder loan or loan from a related company. As a business matures, dividends may be declared and then loaned back to the business for operational purposes. When valuing the shares or equity of a corporation that has loans from shareholders or other related parties, the value of these loans must be deducted from the Enterprise Value of the business along with any other debt and non-operating assets and liabilities. However, it is important to note that the shareholder loans would typically be paid out on a tax-free basis, because these loans were made by the shareholders with after-tax dollars. As a result, owners or sellers should have an understanding of the after-tax proceeds in a potential transaction.

Business owners also often ask about non-operating or redundant assets held in a business, which also impact the Equity Value. Some common examples of these assets include excess cash, marketable securities, real estate, personally used vehicles, and loans receivable (including from shareholders or other related parties). Since these assets do not relate to the ongoing business operations, their values are added to the Enterprise Value in determining the Equity Value.

Identifying redundant/non-operating assets is an important step when preparing a business for sale. Generally, potential buyers are not interested in purchasing these redundant assets or will not pay for their full value since they are most interested in the core operations. When this is the case, it is typically better for the owner to sell or transfer these assets out of the business prior to closing a sale. However, it is not always easy to carve out redundant assets or liability when a business is sold and it is therefore important to understand these items if considering a sale transaction and to work with the appropriate advisor.