Business Valuation In Canada

So, you’re thinking about selling your Canadian business. You’ve considered the timing (as we discussed in the previous article), but now comes another crucial question: what’s it actually  worth? Understanding business valuation in Canada is essential for a successful sale. It sets the stage for negotiations and ensures you get a fair price for your hard work.

Key Takeaways: Understanding Business Valuation

• Business valuation is crucial for setting a realistic asking price and facilitating negotiations.
• Several valuation methods exist, and the most appropriate method depends on the specific business.
• Many factors can influence a business's valuation, including financial performance, market conditions, and intangible assets.
• Working with a professional appraiser is highly recommended for a formal valuation.
  

Example: Let's say a metal fabrication business in Ontario has an EBITDA of $1 million. If comparable companies in the same region are selling at a 4-5x EBITDA multiple, the business could be valued between $4 million and $5 million.

Khaled Baranbo, M&A Advisor in Ontario, Canada, recalls a manufacturing business he worked with that had consistently underinvested in new equipment. While their EBITDA was decent, comparable businesses with modern machinery were fetching higher multiples, ultimately impacting the final sale price. This emphasizes the importance of not just profitability, but also the quality and modernity of assets.

Fun Facts:

• EBITDA multiples for small to mid-sized manufacturing companies have experienced a slight increase in 2024 but have mostly returned to the pre-2020 average of 6-8x, with even higher valuations for companies utilizing advanced technologies like 3D printing.
• Overall, EBITDA multiples in the oil and gas sector have not returned to pre-pandemic levels, with diversified oilfield services and equipment companies performing better than those in oilfield equipment manufacturing, oilfield services, and contract drilling.
• Logistics and transportation firms experienced an increase in their multiples, which subsequently plateaued in 2021-2022 based on their performance amid supply chain shortages, before rebounding in 2024; the strongest sector has been LTL, while the weakest has been asset-based truckload.
• Staffing and recruiting firms enjoy higher multiples compared to other service providers due to the stability of their revenue, with those servicing enterprises achieving the highest ranges (approximately 6x).
• Private equity demand for MSPs is robust, driven by the appeal of the recurring revenue model. However, the industry's fragmented nature and limited scale result in significant variability in EBITDA multiples.
• Valuations in industrial automation and IoT are on the rise, propelled by the urgent need for digital transformation and the growing interest of major acquirers in acquiring businesses valued under $100M.
• HVAC multiples remained steady throughout Q1 2022, with the exception of companies in expanding regions that possess recurring maintenance contracts. However, they experienced a notable surge in late 2022 and continue to represent one of the most significant increases in multiples for the industry up to Q3 2024.
• Valuations have seen a gradual yet consistent increase since Q2 ’23, although they are challenged by rising costs and perceptions of inaccessibility. Firms that offer free quotes and inspections often achieve higher multiples.
• Engineering companies typically experience non-recurring cash flow, resulting in lower EBITDA multiples; however, firms with long-term government contracts are an exception (assuming customer concentration remains below 40%).
• E-commerce valuations continue to be robust following the pandemic, with primary constraints stemming from supply chain issues and "Amazon Fear"; niche specialists are achieving the highest multiples.
• Driven by the transition to remote work, M&A activity in cybersecurity reached its zenith between Q4 2021 and Q2 2022, primarily fueled by PE and VC firms, alongside a limited number of strategic acquisitions. While multiples are slightly reduced as of Q3 2024, they continue to show strength despite a deceleration in deal flow.
• EBITDA multiples in construction tend to be low because of non-recurring revenue and elevated costs; however, as automation (such as modular and prefab) and software become more prominent, these multiples increase.
• Multiples have risen year-over-year for the past three years because of global conflicts (e.g., Russia-Ukraine, Israel-Lebanon).

Source: EBITDA Multiples by Industry & Company Size: 2024 Report

Working With a Business Appraiser in Canada

While you can get a rough estimate of your business's value using online tools or basic calculations, a professional business appraiser provides an objective and defensible valuation report. This report is essential for attracting serious buyers and securing financing. A qualified appraiser will consider all relevant factors and use appropriate valuation methods to arrive at a fair and accurate value.

Final Take: Unlock Business Valuation

• Business valuation is crucial for setting a realistic asking price and facilitating negotiations.
• Several valuation methods exist, and the most appropriate method depends on the specific business.
• Many factors can influence a business's valuation, including financial performance, market conditions, and intangible assets.
• Working with a professional appraiser is highly recommended for a formal valuation.

Next Step:

Now that you understand how business valuation works, it's time to focus on maximizing your business's value. Click here to learn how to boost your business’s financial performance before selling.