Welcome. I’m Eric Jordan. Today, I want to take you on a deep dive into how small businesses are valued, especially in the context of lending and loan recovery. The key takeaway? Tangible assets only tell half the story—intangibles are the secret sauce that can make or break the value and security of a loan.
Let’s start with the basics. When lenders look at a small business applying for financing—say under a million dollars or through government programs like the Canada Small Business Financing Program—they typically start by valuing tangible assets. That means inventory, equipment, leasehold improvements. These are appraised at local replacement cost. Then, additional costs like transporting, installing, and testing these assets get added. This combined figure gives what I call the base tangible valuation.
But here’s where many stop—and that’s a problem.
This base valuation only reflects the physical stuff. It ignores the ecosystem that actually makes those assets productive. Imagine owning a high-end espresso machine. Without the skilled baristas, a loyal customer base, a strong brand, and efficient supply chains, that machine doesn’t generate much revenue. Those supporting factors are intangibles, and they play a critical role.
When these intangible components are fully integrated—meaning they’re proven, reliable, and actively supporting the business—they synergize with the tangible assets. This synergy can multiply the base tangible value, often doubling or even more. It’s like the difference between owning a car and owning a car with a driver, fuel, maintenance, and a ready-to-go route. The whole package is worth much more.
This enhanced valuation framework shifts the focus from mere liquidation value—which is what lenders usually see when things go wrong—to the going-concern value, which reflects a business’s ability to continue generating cash flow and profit.
Now, this isn’t just good business sense—it’s grounded in Canadian law. Several landmark cases have laid the legal foundation for this holistic view.
Take Gifford v. Canada from 2004, a Supreme Court case that set a critical precedent. The court ruled that intangible assets like client lists and goodwill should be treated as capital assets, but only if they provide enduring benefits by integrating with the tangible business operations. What does that mean? If management expertise and client relationships actually help the business generate profits, they add real value on top of the physical assets. So valuators must layer intangibles onto the tangible base to reflect true worth.
Then there’s Canada v. GlaxoSmithKline Inc. in 2012, another Supreme Court decision. It clarified that all economically relevant circumstances must be considered in valuations. This includes how intangibles like intellectual property and supply chains interact with physical assets to create amplified value. The ruling reinforced that intangible uplift should be applied if and only if these factors are fully integrated and supported by business plans and cash flow projections. In other words, it’s not about guessing—it’s about proving synergy.
The Maréchaux v. The Queen case from 2010, later affirmed by the Federal Court of Appeal in 2011, pushed this further. The Tax Court rejected standalone tangible appraisals in tax assessments and insisted that goodwill, workforce, leases, and other intangibles be evaluated as part of the whole business ecosystem. This decision aligns with the idea that these intangibles can effectively double or more the value of tangible assets by supporting ongoing operations.
More recently, the 2025 MEGlobal Canada ULC v. The King case reinforced these principles. It focused on transfer pricing but emphasized how operational intangibles like supply chains and profit projections add significant value to tangible assets. This ruling directly impacts lenders, as it confirms that going-concern synergies enhance the security and recoverability of loans.
And finally, an unnamed 2025 Tax Court case tackled cash reserves, affirming that cash and other intangibles gain elevated value when embedded within synergistic business structures involving management, client bases, and leases. This adds another layer to the holistic valuation, showing that even liquid assets benefit from integration with intangibles.
So what does all this mean for lenders and valuators in practical terms?
If you only value assets based on replacement cost, you risk serious undervaluation and, ultimately, lower recoveries if a loan defaults. Physical assets depreciate, get lost, or become worthless when stripped from their operational context. But when you consider the intangible factors—the client relationships, supply chain stability, management strength—you’re valuing the business as a whole, not just its parts.
This is exactly why I developed the 25 Factors Affecting Business Valuation methodology. It’s designed to capture those intangibles thoroughly and systematically. Without it, lenders face 15 to 25 percent lower recovery rates. That’s a huge gap.
In conclusion, intangible assets don’t just complement tangible ones—they determine their recoverability and value. Backed by Canadian court rulings, this enhanced valuation framework is the future of lending security and business appraisal.
For lenders, valuators, and business owners looking to protect their investments and understand true value, it’s essential to adopt this holistic approach. If you want to learn more about applying these principles, visit our website.
Thanks for listening. I’m Eric Jordan, helping you see beyond the balance sheet.
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