What’s My Business Really Worth?
If you’ve ever asked yourself, “What’s my business actually worth?”—you’re not alone. Whether you’re years away from selling or just want a clearer picture of your company’s health, understanding valuation is foundational to smart entrepreneurship.
In this episode of Your Business Unleashed, Clayton Achen is joined by Gord McFarlane—founder of McFarlane Transition Advisors and former Director of Corporate Development at FYI Doctors—where he led acquisitions of hundreds of clinics across Canada. We break down the science of business valuation, particularly for small and medium-sized companies, and explain why emotion and perception often get in the way of reality.
Why Every Business Owner Needs to Understand Valuation?
Many business owners—especially in medical and professional service industries—believe their brand or reputation automatically adds value to their company. But when cash flow struggles, bank accounts are overdrawn, or liabilities are mounting, even the strongest brand may not hold up in the eyes of a buyer.
Valuation starts with one question: Is your business a going concern?
This means: can your business realistically continue operating and generating positive cash flow? If not, you are not just looking at a low valuation—you may be looking at insolvency. If not a going concern, then the business value would be its liquidation value, either in a forced or orderly liquidation.
Determining the Valuation Approach for Small Businesses
Assuming the business is a going concern then there are three main approaches that professional valuators use to assess what a company is worth:
1. Asset-Based Approach
Where the business is not earning a sufficient return on capital to justify an income or market approach and there is no commercial goodwill then the value of the business’s net assets is its value. Most useful for investment or real estate holding companies, capital-heavy industries (like real estate or construction) and situations where the income generated is attributable to one person, (i.e. no commercial goodwill) such as a very specialized surgical practice. The Asset – Based approach assesses your tangible assets—real property, equipment, etc.—over earnings. If you own equipment or an asset heavy business whose value is greater than the return on your cash flows this might apply to you.
2. Income Approach
Based on prospective future earnings or cash flows. This is the most common method for small businesses in Canada. It estimates the value of future cash flows. Essentially, it asks: If someone invested $100 into this business today, what kind of return could they expect?
Here, valuators use methods like:
- Capitalized Cash Flow (based on historical performance)
- Discounted Cash Flow (forecasting future performance)
The trick? Removing personal bias and emotion. You may be passionate about your company—but a buyer wants a return, not a passion project.
“What is your company worth?” is really just another way of asking, “What return will an investor want to receive for taking on this risk?”
3. Market-Based Approach
This approach compares your business to comparable company multiples and precedent transactions. It works well if you can find comparable public company or transaction multiples such as Enterprise Value/EBITDA. However, given the limited availability of truly comparable data, it makes it generally less useful. Its use therefore may be to corroborate a valuation based on an income approach.
Goodwill: Real or Imagined?
Every founder believes their brand is valuable—and sometimes it is. But valuators distinguish between personal goodwill (tied to their personal skills or reputation) and commercial goodwill (value which is transferable to a buyer).
Example: A medical clinic with patients loyal to one doctor may have significant personal goodwill. Without deliberate succession planning, if the doctor leaves, the patients likely will as well. That’s risky and a buyer is not likely to pay much if anything for the practice. The goal? Convert personal goodwill into commercial goodwill—a systemized, team-based organization reduces the impact of the personal goodwill factor.
The Valuation Mindset Shift
Too many entrepreneurs build businesses to replace a job, and do not think of their small business as an investment vehicle. A proper valuation helps shift that thinking:
- Are you underpaying yourself and overstating your profits?
- Could someone step in and run this business without you?
- Do your numbers hold up without your sweat equity?
If your answer to any of the above is “I’m not sure,” it’s time to zoom out and bring in an expert.
Why your Business Valuation Is Not About You
At the end of the day, your business is worth what someone is willing to pay for it—not what you feel it’s worth. A professional valuation by a Chartered Business Valuator (a CBV) removes the emotion and provides a thorough and objective view of the value of your business.
Think of it as setting a benchmark: even if you’re not selling now, understanding your valuation provides valuable insights and aids in building a more valuable, resilient company.
What’s Next?
In our next episode, we’re diving into how to take these valuation concepts and translate them into real, actionable strategies to boost the value of your company.
