MY VALUATIONS ARE BASED ON CANADIAN AND INTERNATIONAL LAW AND ARE DIFFICULT TO DISMISS

Understanding Fair Market Value

Fair market value (FMV) is a key concept in business valuation. It’s defined by several criteria:

• Highest Price Obtainable: This is the maximum value a business can realistically fetch.
• Open Market: Both the buyer and seller should have a full understanding of the relevant details about the business.
• Prudent Parties: Each party acts in their best interest.
• Arm's Length: Buyer and seller shouldn’t have any personal relationship or conflict of interest.
• Expressed in Terms of Money: FMV is always given in monetary terms.
• No Compulsion: Neither party should feel pressured or obligated to complete the sale.

One of the biggest issues with many valuations is the assumption of “no compulsion to act.” Often, market valuations overlook cases where a seller may have been compelled to sell quickly (due to things like death, disease, divorce, or debt). This lack of transparency can make a valuation less reliable.

FMV in Canadian Law

Canada’s legal framework firmly supports fair market value standards. Here are some key references:

• Income Tax Act (ITA): Section 248(1) defines FMV as “the amount that a willing buyer would pay and a willing seller would accept, with no compulsion to act and both having a clear understanding of relevant facts.”
• Excise Tax Act (ETA): Section 69 aligns with this, stating that FMV is the price agreed upon by independent, knowledgeable parties.
• Special Taxes Act (STA): This section further supports FMV, stressing the importance of an “open market” and informed participants.
• Canada Revenue Agency (CRA): The CRA’s IT-497R bulletin provides further guidance on determining FMV for both tangible and intangible assets.
• Canadian Institute of Chartered Accountants (CICA) Handbook: Chapter 12 offers a comprehensive view of FMV for financial reporting, covering both tangible and intangible assets.

Intangible Assets Under Canadian Law

Intangible assets—things like patents, brand value, and intellectual property—are a significant part of many businesses’ worth. Canadian law recognizes their value and includes specific regulations:

• Income Tax Act (ITA): Section 248(1) acknowledges intangible assets as legal property.
• Excise Tax Act (ETA): Echoes the ITA, recognizing intangible assets in valuations.
• CRA Guidance: IT-497R bulletin includes guidance on the valuation of intangible assets.
• Corporations Act: Section 2 defines intangible assets as “property,” making them a crucial part of FMV.

Recent Developments and Their Impact

Recent legal changes have emphasized intangible assets, especially with updates to the Personal Property Security Act (PPSA) in provinces like BC and Ontario. These changes have brought several benefits:

• Increased Access to Credit: Intangible assets can now be used as collateral, opening doors for financing.
• Improved Risk Management: Banks can consider intangible assets in loan assessments.
• Enhanced Asset Protection: Registering under the PPSA gives lenders a claim on intangible assets, providing security in case of default.
• Streamlined Transactions: The PPSA standardizes security processes for intangible assets, making financing easier.

The Rise of Intangible Assets Over Four Decades

Intangible assets have steadily gained significance, now representing up to 90% of the value of US and Canadian public companies. Here’s a quick look at this trend:

• 1975: Intangible assets were only about 17% of market value.
• 2001: Studies showed intangibles making up 70%.
• 2020: The Ocean Tomo report indicated that 90% of S&P 500 companies’ market value was intangible.

These studies and shifts reflect changes in the modern economy—where knowledge, innovation, and brand value play a dominant role in shaping a company’s worth.

The Importance of Experience

The Eric Jordan “25 Factors Affecting Business Valuation” methodology is backed by years of experience. Here’s why this hands-on approach matters:

• Comprehensive Analysis: The 25 factors cover a full range of elements that affect both tangible and intangible assets.
• Reducing Bias: A structured, transparent approach promotes consistency.
• Defensibility: A clear methodology makes it easier to communicate valuation results with stakeholders.

Why Business Ownership Experience is Key

Experienced business owners bring intuition and insight that can’t be taught. They’ve seen first-hand how market dynamics, customer needs, and intangible factors impact value. This experience means they can identify and measure the intangible elements that drive a business’s success.

The Power of Combining Methodology with Real Experience

The Eric Jordan methodology provides a structured foundation. When paired with the experience of a seasoned business owner, it creates a comprehensive approach to valuation—particularly useful in cases where intangible assets make up a large part of the value.