How to Value a Small Business for Sale in British Columbia

Whether you are buying or selling, the first question is usually simple: what is this business worth? There is no single formula that suits every business, and the answer depends on what is actually being sold and what comes with it.

This article explains in plain words the three building blocks of a small business price (earnings, assets and goodwill), what the British Columbia rules say about allocating the price, and which checks a sound valuation should include. It is general information, not advice on your deal.

This article covers the law of British Columbia.

The three building blocks of value

Most small business prices combine three ideas. Earnings are what the business brings in for its owner after running costs. Assets are what the business owns, such as equipment, inventory and sometimes land. Goodwill is the value of everything else: the customer base, the name, the location and the systems that let the business keep earning after the owner leaves.

Buyers often start from earnings, because earnings show what the business can pay back. Sellers often point to assets and goodwill. A fair price usually sits where the two views meet, and which method suits a particular business depends on its type, its records and its risks. An accountant or business valuator can advise on method.

How the price is allocated on an asset purchase

If you buy the assets of a business, the price must be allocated to each asset at fair market value, and the remaining balance is attributed to goodwill. Since January 1, 2017, goodwill has been depreciable property in CCA Class 14.1, claimed at 5%. The buyer's allocation should match what the seller reports.

The split also matters for PST. Goodwill, accounts receivable, franchise fees, inventory, real property and shares of a business are non-taxable on a PST asset sale, and inventory is exempt if the buyer gives a PST number or a Certificate of Exemption – General (FIN 490). Other assets may be taxable. The parties cannot raise the goodwill price and lower the taxable-asset prices to avoid PST, and the Province may ask for support for the asset values.

A share purchase works differently. A change in share ownership does not change the tax values of the corporation's assets, and the buyer takes the company with its history and liabilities.

What a valuation should check beyond the numbers

A price built only on the seller's financial statements can miss claims against the business. Each of these checks can change what a buyer should pay.

A prior lender's registration against equipment, inventory or receivables can rank ahead of a buyer's claim. There is an exception for a purchase money security interest, which is a security interest taken to secure all or part of the purchase price of the collateral. It can have priority over other security interests in the same collateral and may be perfected within 15 days after the debtor obtains possession, so a recent equipment-financing lender may rank first. A PPR search alone does not show every lien, since builders' liens and family maintenance liens are filed with other agencies.

People, tax and timing that affect the price

• Employees: if a business is sold, an employee's employment is generally deemed continuous, so the buyer takes on the seller's obligations, such as past service for severance or compensation, to employees who stay. There are exceptions: if the seller terminates employees before the sale, the seller owes their outstanding wages and compensation and the purchaser is not liable, and employees who refuse to work for the buyer without substantial changes to their conditions are deemed to have quit. Where a trustee in bankruptcy sells the business as a going concern, the buyer is not liable for wages owed before the bankruptcy and prior service is not treated as continuous.
• Seller's tax on a share sale: the CRA lists the lifetime capital gains exemption on qualified small business corporation shares at $1,250,000 for dispositions after June 24, 2024, and the 2025 figure was listed as proposed, so confirm the current amount and the qualifying tests with an accountant.
• GST/HST: if the buyer acquires all or substantially all (at least 90%) of the property needed to carry on the business, the parties may jointly elect on Form GST44 so that GST/HST is generally not payable on the sale. Even with the election, GST/HST can still apply to certain services, leases and licences, and, for non-registrant recipients, sales of real property. The election is not available where the supplier is a registrant and the recipient is not.

What to do next

• Gather three or more years of financial statements, tax returns and a list of what is included in the sale.
• Decide whether the deal is an asset purchase or a share purchase, because the price is allocated and taxed differently.
• Order the PPR, title, bankruptcy and corporate searches that fit the business before agreeing on a final number.
• Ask an accountant to review the allocation and tax effects, and a lawyer to review the agreement before you sign.

Frequently asked questions