How is the value of my small business determined when I want to sell it in Ontario?

There is no single formula for valuing a small business in Ontario, but for tax purposes the CRA defines fair market value as the highest price obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, with neither party under compulsion to transact.

The CRA treats the earnings method and the asset value method as the two most generally accepted bases of valuation. The earnings method is used mainly for operating businesses that make or sell products or services, while the asset value method suits businesses that earn income mainly from their assets rather than from the owners' personal efforts. Fair market value is generally the greater of liquidation value and going concern value.

To justify a price, the CRA lists factors such as the nature and history of the business, the industry outlook, the balance sheet, earnings record and earning power, goodwill and other intangibles, and underlying asset value. Capitalization rates reflect risks such as management depth, competition and ease of entry into the market. Multiples used in practice vary by industry, so an accountant or valuator can help set a realistic asking price.