How is the value of shares in a private Ontario corporation determined?

Valuing shares in a private Ontario corporation is more complex than valuing publicly traded shares, because there is no market price to look up. Valuation is required in many situations: buying out a departing shareholder, implementing a buy-sell provision, estate planning, a family law proceeding, or a proposed sale of the company.

The most common valuation standard used in Canadian private company contexts is "fair market value" — the price a hypothetical, arm's-length buyer and seller would agree on in an open market, where neither is under compulsion to transact and both are reasonably informed. This is the standard the Canada Revenue Agency uses for tax purposes.

Common valuation approaches include the earnings-based approach (capitalizing or discounting the company's earnings or cash flow), the asset-based approach (appraising the net assets of the business), and the market approach (comparing the company to similar businesses that have been sold). Most valuations for private companies use a combination of these methods, and adjustments are made for minority discounts and the lack of marketability of private company shares, depending on the purpose of the valuation.

Shareholder agreements often pre-agree on a valuation formula — for example, a multiple of EBITDA — to avoid the cost and conflict of a full independent valuation every time a buyout is needed. A Chartered Business Valuator (CBV) is the recognized credential for professionals conducting formal private company valuations in Canada.