Determining the fair value of a business requires more than reviewing the balance sheet. In Canada, valuation professionals make key adjustments to reflect the company’s true earning potential and financial position. Below are four adjustment types commonly used.

1. Non-recurring Adjustments

Unusual or one-time events in financial history may not reflect the company’s future performance. Examples include legal settlements, temporary supply chain disruptions, or income from a discontinued product line.

These adjustments help isolate ongoing revenue and expenses, which form a better basis for forecasting future earnings.

2. Normalizing Adjustments

If a company uses accounting practices that differ from standard Canadian methods or industry norms, valuators may adjust the financials to allow better comparison and analysis.

Adjustments can include:

1. Revising depreciation schedules

2. Shifting from cash-based to accrual accounting

3. Adjusting for lease commitments

4. Writing off uncollectible debts

This step is especially important when applying industry benchmarks or market multiples.

3. Control Adjustments

Owners of private companies may use the business to achieve tax or personal goals. Valuators may adjust for items such as:

• Above-market owner compensation

• Family members on payroll without active roles

• Personal vehicle or housing costs paid through the business

However, if the valuation concerns a minority interest, such adjustments may not apply unless that owner has control over such policies.

4. Balance Sheet Adjustments

Valuation experts review the balance sheet for completeness and accuracy. Items of note include:

• Unrecorded intangible assets like patents or trade secrets

• Contingent liabilities such as legal risks or pending obligations

• Fully depreciated assets that are still in use

• Noncore assets like surplus cash or investments

These adjustments are factored into both the value estimate and the overall analysis of business health.

Expertise Matters

Each business is unique. The adjustments needed depend on the company’s structure, reporting practices, and valuation purpose.

At Aspen Valuation, we provide Canadian business owners and advisors with clear, customized valuation reports based on sound methods and national standards.