Intangible asset questions that should be asked of every business valuator?
- What is your experience with, and do you have, a methodology to measure intangible assets like R&D, branding, PR, workforce, clientbase, utility, and sustainability?
- As the chart points out, there are big asset changes between 1975 and 2022. What experience and methodology do you have to recognize if a company could utilize assets like blockchain which will transform many industry?
- Have the valuator explain their methodology and ask if they are compliant with the Income Tax Act Policy and 41 points therein?
- If the expert really is an expert, they will have a solid methodology.
To our knowledge there is no business valuation group or association with a robust methodology or system in place to value intangible assets and produce a tax compliant business valuation in Canada or the world that can compete with Eric's Gold Standard.
Eric's 25 Factors Methodology Resolving Non-Compliance Issues
- Intangible Assets must be measured in order to calculate “fair market value” and be compliant with the income tax act.
- Unverified or incomplete business sale price data must not be used to calculate “fair market value” in a compliant business valuation.
The 25 factors methodology resolves non-compliance issues, captures your intangible assets, and delivers a business valuation that follows the Tax Act Policy Paper.
Why are we the only valuation firm in Canada that will refer you to the Income Tax Act Policy Paper governing business valuation? Being compliant with the legislation is what counts. We can show you exactly how and why we are compliance friendly and how we go far beyond what is required.
See below a review of the 41 points in the Tax Act Policy Paper that show how Eric Jordan’s “25 Factors” methodology is more than compliant with the Income tax Act, while others are likely to be found non compliant. Source
If my client was facing one of the standard valuations, these are the recommendations I would make to their lawyer:
- I would be suggesting to my clients lawyer that they question any opposing valuation about the methodology used in valuing intangible assets while calculating fair market value.
- I would also be suggesting that my client’s lawyer question any data used in an opposing valuation using “comparable sale price data” to see how all parts of that data was collected and verified in calculating market value.
What if Canada Revenue Agency is asking these questions?
For those of you who are working with clients who need business valuations for CRA, Divorce, or other purposes you may or may not know that the only legislation in Canada on Business Valuation comes from the The Income Tax Act and the Canada Revenue Policy Paper on Business Equity Valuations. They refer to different asset classes but they are clear that some asset classes should be given more weight depending upon importance. We believe this means the intangible assets that now make up on average 90% of business value should be considered in proportion to their contribution to company value.
We have a Methodology developed to facilitate the demands of the Income Tax Act as it pertains to the intangible assets. It is called “25 Factors Affecting Business Valuation”
We give each relevant factor a weight or dollar value and this is how we calculate “fair market value”.
The old methods from 1975 are now redundant;
Hard Assets Approach - (This might only represent 10% of a company’s value in 2022)
Income approach - (the multiple many use has no connection to the wealth creation factors)
Market approach (comparable sales) - This would be like relying on data coming out of Venezuela.
- Who interviewed the Seller?
- What was the real reason for the sale?
- Was the price manipulated by an agent who knew the owner's wife had a serious illness?
- What were the real sale and financing g terms?
- How deeply did they look at the workforce?
- How was the client base measured?
Revenue Canada sets the rules and if your clients valuation has ignored 60% to 90% of the value in the company (intangible assets) the valuation might not do so well on review. When parameters have changed like this precedent can no longer be relied upon.
There are some serious issues with much of the data used in generating “comparable sales” as we noted above.
The 1975 Business Valuation Methodology might be compared to a broken clock; (correct twice a day) but is that the way you want your client to have their business valued?
The weighing of Intangible assets in finding fair market value is reflected in Point 7 in the Tax Act Policy Paper “Depending on the nature of the corporation's business, certain of the relevant factors may be accorded greater weight. In some businesses, earnings may be the primary determinant of value, while in others it may be asset value. The valuator must consider a different combination of factors in each case in determining fair market value”.
“Certain of the relevant factors may be accorded greater weight.”
This is significant because for the last 15 years or more intangible assets have been by far
the largest asset component in the average business. Most reports suggest in the range of 90% today.
Currently business valuators are hoping that precedent will protect their 1975 methods of business valuation. However it is abundantly clear the parameters of the debate have fundamentally shifted. Any good lawyer can easily show a court the chart on the fundamental change and how the Canada Income Tax Act Policy Paper requires all asset classes to be weighed.
Precedent and stare decisis
The doctrine that lower courts must follow the decisions of higher courts is fundamental to our legal system. It provides certainty while permitting the orderly development of the law in incremental steps. However, stare decisis is not a straitjacket that condemns the law to stasis. Trial courts may reconsider settled rulings of higher courts in two situations: (1) where a new legal issue is raised; and (2) where there is a change in the circumstances or evidence that “fundamentally shifts the parameters of the debate”.
The lawyer arguing that “stare decisis” is not a straitjacket will have to be experienced and competent.
