How are businesses valued?
— Advanced Planning and Services, Scotia Capital Inc.
Determining the value of the shares you own in a public company is relatively simple - the stock price is listed on an exchange like the Toronto Stock Exchange. The price reflects the current market value of an individual share. However, arriving at a value for your private company shares is much more complex.
Entrepreneurship is not just about managing the day-to-day challenges of business operations but also about strategically planning for the future, which may involve a business owner divesting ownership of their private company. Divesting that ownership has consequences from both a future wealth perspective and a tax perspective. The good news is that steps can usually be taken to prepare for that disposition to reduce taxes, maximize value, and transfer wealth to family members in a meaningful way.
Therefore, understanding how businesses are valued is not just a theoretical exercise but a critical component of informed decision-making.