Question #9
Question #9
Business Valuation Report Example: What Is in the Report and How to Read It
Most people have never seen a business valuation report before they pay for one. Here is a section-by-section walkthrough of what the report contains, what each section does, what separates a strong report from a weak one, and how to evaluate what you are getting before you spend $3,500 to $15,000.
By Eric Jordan, CPPA — International Business Valuation Specialist | Expert Witness (Canada)
Fee Range: $1,500 – $15,000 | Basic Average: $3,500 | 877-355-8004 | Timeframe: 1 to 2 weeks from when documents are available
In This Guide
The Three Report Levels: Comprehensive, Estimate, and Calculation
Section-by-Section Walkthrough of a Business Valuation Report
What a Strong Report Looks Like vs. a Weak One
Red Flags: What Should Concern You
How Different Audiences Evaluate the Report
What to Ask Before You Hire a Valuator
Frequently Asked Questions
In Canada, business valuation reports are categorized into three levels. The levels reflect not just the length of the report but the scope of analysis, the degree of independent verification, and the level of assurance the valuator provides about the conclusion.
The distinction matters because the intended audience determines the minimum report level. A court expects a Comprehensive report that can be tested under cross-examination. CRA expects at least an Estimate report that demonstrates a genuine attempt at fair market value. A bank may accept a Calculation report for a small loan but require an Estimate for a larger one. Choosing the wrong report level is one of the most common and most avoidable mistakes in the valuation process.
The following walkthrough describes what each section of a well-prepared valuation report contains and why it matters. The exact section headings vary by valuator, but the content components are consistent across professional reports.
Section 1: Executive Summary
The first section states the conclusion of value and the key facts: the name of the business, the valuation date, the standard of value (typically fair market value), the purpose of the valuation, and the interest being valued (100% of shares, a minority interest, specific assets). It may also state the report level (Comprehensive, Estimate, or Calculation).
What to look for: The standard of value and the purpose should match your actual situation. A report prepared for “internal planning purposes” may not be suitable for a court proceeding. The valuation date should align with the relevant transaction or event date.
Section 2: Scope and Mandate
This section describes who retained the valuator, the specific instructions received, any restrictions on the scope of the engagement, and the sources of information relied upon. It also identifies what the valuator did and did not do — for example, whether an on-site visit was conducted, whether financial statements were independently verified, and whether management representations were relied upon.
What to look for: A statement that no on-site visit was conducted is a significant limitation. Reliance on unverified management representations without independent corroboration is another. These disclosures are not failures — they are honest limitations — but they affect the weight the report can be given.
Section 3: Description of the Business
The business description covers the history of the company, the nature of its operations, its products or services, its organizational structure, its ownership, its key personnel, and its competitive position. In a thorough report, this section is informed by both document review and on-site inspection.
What to look for: Does the description read like it was written by someone who has actually seen the business operate, or does it read like it was compiled from the company’s own materials? Observations about the physical premises, workforce behaviour, customer interactions, and operational flow indicate the valuator was present. Generic descriptions copied from marketing materials indicate the valuator was not.
Section 4: Industry and Economic Overview
This section places the business in context: the industry it operates in, trends affecting the sector, economic conditions at the valuation date, and competitive dynamics. It supports the valuation by establishing whether the business is operating in a growing, stable, or declining environment.
What to look for: The analysis should be specific to the business’s actual industry and geography, not a generic overview of the Canadian economy. A report that spends three pages on national GDP growth but says nothing about the specific market the business serves is padding, not analysis.
Section 5: Financial Analysis and Normalization
This is one of the most important sections. It presents 3 to 5 years of historical financial statements and adjusts (“normalizes”) them to reflect the business’s true economic earnings. Common normalizations include: adjusting owner compensation to market rate, removing personal expenses, eliminating related-party transaction distortions, adding back non-recurring items, and adjusting for accounting policy choices that do not reflect economic reality.
What to look for: Every normalization adjustment should be individually identified, explained, and quantified. If the report adds $80,000 to earnings for “excess owner compensation,” it should state the owner’s actual compensation, the estimated market rate for a replacement, and the basis for the market rate estimate. Adjustments presented without explanation are assertions, not analysis.
The normalization test: After reading the normalization section, you should be able to answer: what would this business earn if it were run by a hired manager at market compensation, with no personal expenses flowing through it, and no related-party distortions? If you cannot answer that question from the report, the normalization is inadequate.
Section 6: Intangible Asset Identification
This section identifies and classifies the business’s intangible assets: customer relationships, brand and marketing assets, contractual assets, technology and intellectual property, operational processes, trained workforce, data assets, and residual goodwill. Each category should be described, attributed to the enterprise or to specific individuals, and assessed for transferability.
What to look for: If this section does not exist, or if it consists of a single paragraph stating that the business has goodwill of $X, the valuation has not identified the most significant components of value. In most Canadian small and medium businesses, intangible assets represent 60% to 90% of total value. A report that does not identify them cannot have accurately valued the business.
Section 7: Owner Dependency and Risk Assessment
This section assesses the degree to which the business depends on the owner’s personal involvement, and identifies other risk factors that affect value: client concentration, supplier dependency, regulatory risk, key-person risk beyond the owner, competitive threats, and operational vulnerabilities.
What to look for: The assessment should be based on observable evidence — what the valuator saw during the on-site inspection, what employees described, what the client relationship structure reveals — not on abstract assertions about risk. A report that states “moderate owner dependency” without explaining the basis for that conclusion has not assessed the risk.
Section 8: Valuation Methodology and Calculations
This is the technical core of the report. It presents the approaches used (income, asset, market, or a combination), explains why each was selected or rejected, shows the calculations, and reconciles the results into a single conclusion.
The structural problems with each traditional approach
The three approaches above are universally accepted. They are also, when applied in isolation or without sufficient supporting analysis, each structurally flawed in ways that matter for small and mid-market Canadian businesses:
The income approach values a business based on its future earnings capacity. But its reliability depends entirely on the quality of the inputs — normalized earnings, growth assumptions, and the capitalization or discount rate. The capitalization rate in particular is built on layers of estimates: the risk-free rate, equity risk premium, size premium, and company-specific risk premium. If the valuator has not conducted an on-site inspection, has not assessed owner dependency, has not mapped client concentration, and has not identified the intangible assets generating the earnings, the company-specific risk premium is a guess. A guess compounded through the capitalization formula can distort the value by 20% to 40%.
The asset approach values a business based on what it owns. For most service, professional, and knowledge-based businesses, this approach captures only a fraction of value because intangible assets — which represent 60% to 90% of enterprise value in the modern economy — do not appear on the balance sheet under Canadian accounting standards. A dental practice with $200,000 in equipment and a $1,200,000 patient base will show $200,000 under the asset approach unless intangible assets are separately identified and added. The approach is not wrong; it is incomplete whenever intangible value is significant.
The market approach values a business by comparing it to similar businesses that have sold. The structural problem is that private business sale data is unreliable: transaction databases contain limited information about the circumstances of each sale, many transactions involve distress, urgency, or non-arm’s-length conditions that do not meet the fair market value standard, and the intangible asset composition of the comparable business is almost never disclosed. Two businesses in the same industry with the same revenue can have entirely different intangible asset profiles, owner dependency levels, and risk characteristics. Applying a multiple from one to the other assumes comparability that rarely exists.
The common thread: All three traditional approaches were developed for public company valuation, where financial data is audited, markets are liquid, and intangible assets are disclosed through purchase price allocation. When applied to private Canadian businesses without adaptation, they systematically undercount intangible value, overlook operational risk, and produce conclusions that depend on assumptions the report cannot verify from financial statements alone. This is not a theoretical concern — it is the reason valuations are challenged in court, rejected by CRA, and questioned by buyers.
How the 25 Factors and the 5 Senses Inspection Report address these gaps
The 25 Factors Affecting Business Valuation is a structured framework that systematically identifies and measures the specific value drivers and risk factors in a business — the inputs that the traditional approaches require but do not themselves generate. Each of the 25 Factors corresponds to an observable, measurable aspect of the business: client base composition and retention, owner dependency and key-person risk, workforce depth and capability, operational process documentation, competitive positioning, regulatory exposure, brand and reputation strength, technology and data assets, contractual assets and liabilities, and others.
The 5 Senses Inspection Report is the on-site methodology that populates these factors with evidence. Rather than relying on management representations or financial statement analysis alone, the valuator physically visits the business and observes: who customers interact with (sight and sound), how the workspace is organized and maintained (sight), whether operational processes are documented or improvised (sight and touch), how employees describe decision-making authority (sound), and what the physical condition and utilization of assets reveals about the business’s actual operations versus its reported ones.
Together, these methodologies solve the specific problems identified above:
For the income approach, the 25 Factors provide the evidentiary basis for the company-specific risk premium. Instead of asserting “5% company-specific risk” as a round number, the valuator can point to specific findings: owner dependency is high (Factor X), client concentration exceeds 40% in the top 3 accounts (Factor Y), operational processes are undocumented (Factor Z). Each finding is observable, documented, and defensible.
For the asset approach, the intangible asset identification built into the 25 Factors captures the value that the balance sheet misses. Each intangible asset category is assessed during the on-site inspection and valued using appropriate methodology, closing the gap between net tangible asset value and enterprise value.
For the market approach, the 25 Factors provide the basis for adjusting comparable transactions. If the comparable business was sold by an owner with low dependency and a diversified client base, but the subject business has high dependency and concentrated revenue, the 25 Factors quantify the difference rather than leaving the adjustment to unsupported judgment.
What to look for in the report: A valuation report that uses these or similar structured frameworks will contain specific, evidence-based findings that connect the on-site observations to the valuation inputs. The business description will read like a field report, not a brochure. The risk assessment will cite observable facts, not abstract categories. The capitalization rate build-up will reference identified factors, not industry averages. And the conclusion will be traceable from the evidence through the methodology to the number.
What to look for in the capitalization rate specifically: The discount or capitalization rate is the single most sensitive input in the income approach. A difference of 2 to 3 percentage points in the capitalization rate can change the value by 20% to 30%. The rate should be built up from identified components, not presented as a round number. If the report states a capitalization rate of 25% with no build-up, there is no way to evaluate whether the rate is appropriate.
Section 9: Conclusion of Value
This section synthesizes the results of the different approaches into a single conclusion. If multiple approaches were used, the report should explain how they were weighted or reconciled. The conclusion should state the value as of the specific valuation date, for the specific interest valued, under the specific standard of value defined at the outset.
What to look for: The conclusion should follow logically from the preceding analysis. If the income approach indicates $1,200,000, the asset approach indicates $400,000, and the market approach was not applied, but the conclusion is $1,500,000, something is unexplained.
Section 10: Qualifications, Restrictions, and Appendices
The final section states the valuator’s credentials, lists restrictions on the use of the report (it is typically restricted to the parties named in the mandate), and includes appendices with supporting data: detailed financial statements, normalization worksheets, industry data, and comparable transaction details if applicable.
No on-site visit. A valuation conducted entirely from financial statements and documents, without the valuator visiting the business, cannot assess owner dependency, operational reality, workforce capability, physical condition of assets, or intangible value drivers that are only observable in person. This is the most significant limitation a valuation can have.
Goodwill as a single undifferentiated number. If the report values intangible assets as a single line item called “goodwill” without identifying what that goodwill consists of, the valuation has not done the work necessary to understand what drives the business’s value. This matters for every purpose: CRA wants to know whether personal goodwill is included in the freeze value, courts want to know whether goodwill is personal or enterprise in divorce, and buyers want to know whether the intangible value will survive the transition.
Unexplained normalization adjustments. If the report adds $150,000 to earnings without explaining what the adjustment represents, you have no way of evaluating whether it is appropriate. Neither does a court, CRA, or a buyer.
Round-number capitalization rate with no build-up. The capitalization rate is the most influential single input in the income approach. A rate of 22% produces a value roughly 15% higher than a rate of 26%. If the report does not explain how the rate was determined, the conclusion is unsupported.
Comparable sales without source data. If the market approach uses comparable transactions but does not identify the source database, the selection criteria, or the adjustments made for differences between the comparables and the subject business, the comparables are unverifiable. In court, this section will not survive cross-examination.
Report significantly shorter than expected. A Comprehensive report for a $3,000,000 operating business that is 20 pages long has almost certainly not included the level of analysis the report level implies. Length alone does not equal quality, but extreme brevity is a reliable indicator of insufficient depth.
No limitations or restrictions section. Every honest valuation has limitations — information that was not available, assumptions that could not be verified, scope restrictions imposed by the engagement. A report that presents its conclusion with no caveats is either not forthcoming about its limitations or not aware of them.
The cross-examination test: Before accepting a valuation report, ask yourself: if an opposing lawyer asked the valuator to explain every assumption, justify every adjustment, and defend every conclusion under oath, would the report hold up? If the answer is uncertain, the report may not be sufficient for its intended purpose.
Before engaging a valuator, the following questions will help you evaluate whether the report you receive will be adequate for its intended purpose:
“Can I see a redacted sample of a report you have prepared?” This tells you more about what you are buying than any description of services. Look for on-site inspection findings, intangible asset identification, detailed normalizations, and a built-up capitalization rate.
“Will you conduct an on-site visit to the business?” If the answer is no, understand that the valuation will be based entirely on documents and management representations. For any purpose beyond preliminary planning, this is a significant limitation.
“How do you identify and value intangible assets?” The answer should describe a systematic process — not “we calculate goodwill as the residual.” If the valuator does not have a framework for intangible asset identification, the report will not capture the majority of value in most service and knowledge-based businesses.
“How do you build your capitalization or discount rate?” The answer should reference specific components: risk-free rate, equity risk premium, size premium, company-specific risk factors identified from the analysis. If the answer is “we use industry standard rates,” the rate may not reflect the specific risk profile of your business.
“What report level are you recommending, and why?” A valuator who recommends a Comprehensive report when you only need a Calculation may be upselling. A valuator who recommends a Calculation when you are heading to court may be setting you up for failure. The recommendation should match the intended use.
“What is the timeline, and what do you need from me?” A reasonable timeline is 1 to 2 weeks from when documents are provided and the on-site inspection is completed. If the valuator quotes 3 to 6 months for a straightforward engagement, either they are backlogged or the process is unnecessarily complex.
The report is typically restricted to the parties named in the engagement mandate. It should not be shared with third parties without the valuator’s consent. In litigation, the report may be disclosed to the opposing party and the court as part of the legal process. In CRA matters, the report may be provided to CRA auditors upon request. The restrictions section of the report will specify who may rely on it.
Yes. A second valuator can prepare a critique or rebuttal of the first report, identifying areas of disagreement with the methodology, assumptions, or conclusions. This is common in contested proceedings where each party retains their own valuator. A critique is not a full valuation — it is an analysis of the first valuator’s work. It typically costs less than a full valuation but requires the second valuator to have the first report and supporting data.
The purpose of an independent valuation is to determine fair market value, not to confirm the owner’s expectations. If the value is lower than expected, the report should explain why — typically through owner dependency, client concentration, competitive risk, or market conditions. If the explanation is not persuasive, you can discuss the specific points of disagreement with the valuator. A good valuator will explain their reasoning and consider additional evidence. What they should not do is change the conclusion to match your expectations.
A valuation report is valid as of its valuation date. It reflects the business’s value at that specific point in time. If the business has changed materially since the valuation date — significant revenue growth or decline, acquisition or loss of major clients, regulatory changes, economic shifts — the report may no longer reflect current value. For transactions, the valuation date should closely precede the transaction date. For ongoing purposes, annual updates may be appropriate.
No. A valuation is a professional opinion of value based on the information available, the methodology applied, and the assumptions made as of the valuation date. It is not a guarantee that the business will sell for that amount, that CRA will accept that amount, or that a court will adopt that amount. What a well-prepared report guarantees is that the conclusion is supported by transparent analysis, defensible methodology, and documented evidence — which is what every audience (courts, CRA, banks, buyers) evaluates.
Sometimes. A Comprehensive report prepared for divorce proceedings at fair market value may also satisfy CRA requirements for an estate freeze, because both require fair market value and the Comprehensive level exceeds CRA’s minimum expectations. However, a Calculation report prepared for internal planning will not satisfy a court’s requirements for a contested proceeding. Check whether the report level, standard of value, valuation date, and scope match the requirements of each intended use before relying on a single report for multiple purposes.
Speak Directly With the Valuator
Contact Eric Jordan, CPPA — Expert Witness (Canada)
Toll-free & available 24/7 · Canada-wide
877 355 8004
[email protected]
© Eric Jordan — International Business Valuation Specialist | Expert Witness (Canada)
Contact Eric Jordan, CPPA — Expert Witness (Canada)
Toll-free & available 24/7 · Canada-wide