How is the price of a small business valued when selling in Ontario?

For tax purposes, the CRA treats the earnings method and the asset value method as the two most generally accepted bases of valuation. The CRA defines fair market value as the highest price obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties at arm's length, with neither under compulsion to transact.

The earnings method is used mainly for operating businesses that sell products or services, while the asset value method suits businesses that earn income mainly from their assets. Value is generally the greater of liquidation value and going concern value, with going concern value used where the business can earn a reasonable return on investment.

When the CRA looks at whether a price is justified, it considers factors such as the balance sheet, earnings record, goodwill and other intangibles, and it says capitalization (multiple) rates reflect risks such as management depth, competition and ease of entry into the market. When an agreement sets no reasonable asset prices, the CRA allocates the price to assets at fair market value, then inventory, with the balance to goodwill. Because valuation involves judgment, confirm your approach with a lawyer or accountant.