Business Valuation Calculator

The three ways a business gets valued

A multiple is a shortcut through one of three recognised approaches. Knowing which one is doing the work tells you when the shortcut holds and when it does not.

• Income approach. Value is a function of the earnings the business can sustainably produce, converted into a capital sum: either by capitalising a normalised earnings figure at a multiple, or by discounting projected cash flows. This is the dominant approach for a profitable operating business, and it is what this calculator approximates.
• Market approach. Value is inferred from what comparable businesses actually sold for. Powerful in principle, awkward in practice for Canadian small business, because private transaction data is thin and rarely truly comparable in size, sector and structure at once.
• Asset-based approach. Value is the adjusted worth of the assets less the liabilities. This becomes the relevant approach when a business is asset-heavy, holds real property, or earns less than its assets could earn elsewhere: because at that point nobody would pay an earnings multiple for it.

The floor is important: a business is worth at least what its assets are worth net of debt, because that is what a buyer could realise by winding it up. If an earnings multiple produces less than that, the earnings approach is the wrong one for this business.

Normalise the earnings before you apply any multiple

This is where most owner-run valuations go wrong, and it usually moves the answer more than the choice of multiple does. The earnings figure in your financial statements reflects decisions made for tax reasons, not decisions a new owner would make. A valuator restates it to what the business would earn under normal, arm’s-length management. Common adjustments:

• Owner compensation. Replace what you actually paid yourself with what it would cost to hire someone to do your job at market rate. Many owners under-pay themselves and take dividends, which flatters profit; others over-pay themselves for tax planning, which understates it.
• Personal expenses running through the business. The vehicle, the phone, the travel that was partly a holiday. Add back the genuinely personal portion, and be prepared for a buyer’s accountant to want evidence, because unsupported add-backs are the fastest way to lose credibility in a negotiation.
• Related-party rent. If you own the building and charge the business above or below market rent, restate it to market. Otherwise you are valuing a landlord decision rather than a business.
• One-off items. A lawsuit, a bad debt write-off, a government subsidy, a single unusual contract. Remove anything a buyer cannot expect to repeat, in both directions.
• Non-recurring revenue. The pandemic-era spike, the one enormous project. A multiple applied to a year that will not repeat produces a number nobody will pay.

For a business where the owner is the operator, the resulting figure is often expressed as seller’s discretionary earnings (earnings before interest, tax, depreciation, amortisation and one owner’s full compensation) because a buyer stepping into the role captures that salary. For a larger business that already has management in place and will be bought by someone who does not intend to work in it, EBITDA is the right base. The two are not interchangeable, and multiples quoted against one do not transfer to the other. Applying an EBITDA multiple to an SDE figure is a standard way to arrive at a wildly inflated number.

The multiple is a risk judgement, not a lookup

A multiple is the inverse of a required return. A 4× multiple implies a buyer wants their money back in about four years of current earnings; a 2× multiple says they want it back in two, because they think the earnings are less safe. So everything that determines the multiple is really answering one question: how confident is a buyer that these earnings continue after you leave?

What pushes a multiple up: recurring or contracted revenue, a diversified customer base, documented processes, a management team that can run it without the owner, defensible margins, and clean financial records that survive due diligence. What pushes it down, hard:

• Customer concentration. One client at 40% of revenue is the single most common discount in Canadian small-business deals. Buyers price the risk that the client leaves with you.
• Owner dependence. If the relationships, the technical knowledge or the sales all live in your head, the buyer is purchasing a job rather than a business.
• Weak records. Books that cannot be substantiated shrink both the price and the pool of buyers, because a lender will not finance what a lender cannot verify.
• Transferability risk. Leases, licences, franchise agreements or key supplier contracts that do not survive a change of control.

Enterprise value is not what lands in your bank account

A multiple applied to earnings gives you enterprise value: the value of the business operations. It is not the price you receive. Three adjustments stand between them, and skipping them is the most common reason an owner’s expectation and an offer differ by a large margin:

1. Subtract debt, add surplus cash. Enterprise value less interest-bearing debt plus excess cash gives equity value. A business with a $400,000 enterprise value and $150,000 of debt is a $250,000 equity sale.
2. Settle normalised working capital. Deals are normally priced on the assumption that a normal level of receivables, inventory and payables comes with the business. Leaving with the receivables, or arriving with an abnormally low balance, is adjusted for at closing.
3. Then tax. Which is where the deal structure starts to matter more than the price.

Share sale or asset sale: the same price, two different outcomes

In Canada this is usually the most consequential negotiation in the whole transaction, and it pulls the two sides in opposite directions.

A vendor generally wants a share sale. Proceeds are a capital gain rather than a mix of recaptured depreciation and business income, and shares of a qualifying small business corporation may be eligible for the lifetime capital gains exemption, which can shelter a very substantial amount of gain from tax entirely. That exemption is only available on shares, so it is unavailable to a sole proprietor by construction, which is one of the real, non-obvious arguments for incorporating well before a sale rather than at the point of it. The qualification tests look at what proportion of the company’s assets are used in an active business, both at the moment of sale and over the preceding period, so a company sitting on investments or surplus cash can fail them. Fixing that takes time, which is why this is a conversation to have years ahead of a sale, not months.

A purchaser generally wants an asset sale. They get a fresh cost base on the assets they buy and can claim capital cost allowance on it, they can leave behind liabilities and contracts they do not want, and they inherit no history. A hybrid structure attempts to give each side part of what it needs, and it is professional-advice territory rather than something to improvise.

The practical point for reading the number this calculator gives you: an identical headline price can produce materially different after-tax proceeds depending on the structure, and a buyer offering less on a share basis may be offering you more. Get a tax opinion on structure before you agree a price, because by then the leverage is gone.

What this calculator is good for, and when to get a real valuation

A multiple-based estimate is genuinely useful for a sanity check, a shareholder conversation, planning a sale horizon, or deciding whether an unsolicited offer is in the right postcode. It is not adequate where the number has to withstand challenge: a shareholder dispute, a matrimonial settlement, a tax filing, an estate, or an actual transaction. Those need a valuation from a Chartered Business Valuator, who will run more than one approach, document the assumptions, and produce something defensible.

Complementary tools: profit margin to establish the earnings base, cash flow to test whether the earnings are real cash, and capital gains for the tax on a disposition.