01/02/2024
LEGAL DEFINITION OF FAIR MARKET VALUE IN CANADA
The legal definition of Fair Market Value in Canada, is the highest
price, expressed in money, that property would bring in an open and
unrestricted market, between a willing buyer and a willing seller who
are both knowledgeable, informed, and prudent, and who are acting
independently of each other and neither party being under any
compulsion to buy or sell.
Legal Arguments Against Traditional Valuation Approaches:
Market Approach:
Private Company Data: The sales data used in the market approach
should come from private company transactions, where it's impossible
to verify if both sellers and buyers were acting freely without
pressure. This violates the Canadian legal definition of fair market
value which requires comparisons to be between buyers and sellers who
are not under pressure to buy or to sell.
Lack of Comparability: Finding truly comparable companies for private
businesses can be challenging, especially when considering unique
intangible assets. Even seemingly similar companies can have vastly
different underlying value drivers, leading to inaccurate valuations.
Limited Transparency: The methodologies used in the market approach
can be opaque, making it difficult for business owners to understand
how their company's value was determined and leaves the door wide open
to potential legal challenges.
Income Approach:
Focus on Historical Data: The income approach relies heavily on
historical financial performance to project future cash flows. This
fails to adequately consider intangibles like brand value,
intellectual property, and future growth potential that significantly
contribute to a company's worth.
Subjectivity in Discount Rates: The discount rate used to present
value future cash flows plays a crucial role in the income approach.
However, choosing the appropriate rate can be subjective and can
significantly impact the final valuation. (SEE PART 2 BELOW)
Limited Applicability: The income approach may not be suitable for
early-stage businesses or those with limited historical financial
data, leading to unreliable valuations. Mark D. Wiseman and the
Canadian Pension Plan proved in 2009 that the Income Approach to
business valuation was wrong by “a billion dollars” and should never
be used in a serious valuation that has intangible assets.
Asset Approach:
Neglect of Intangibles: The traditional asset approach primarily
focuses on tangible assets, ignoring the growing importance of
intangible assets like brand, customer relationships, and intellectual
property. This leads to significant underestimation of the business's
true value in today's economy.
Book Value Discrepancies: Book values of assets often don't reflect
their current market value, especially for intangible assets. Relying
solely on book values can therefore lead to inaccurate valuations.
Liquidation vs. Going Concern: The asset approach typically assumes a
liquidation scenario, which discounts assets based on their fire-sale
value. This does not reflect the going concern value of a business as
a functioning entity, potentially undervaluing the company.
Here again Mark D. Wiseman and the Canadian Pension Plan proved in
2009 that the Income Approach to business valuation was wrong by “a
billion dollars” and should never be used in a serious valuation that
has intangible assets.
The Ocean Tomo report and other similar reports showing that
intangible assets are now up to 90% intangible assets and have been
for some time.
Why would anyone trust business brokers or real estate agents or
accountants about the legal definition of FAIR MARKET VALUE.
