Preparing for a Business Valuation or Economic Loss Claim – It Starts with Good Recordkeeping
The necessity for a business valuation in Toronto or an economic loss claim can happen unexpectedly. Therefore it is important to understand the documents required for a business valuation or economic loss report. Keeping good records and staying organized can minimize the business valuator’s time and cost to develop a valuation or economic loss report.
At minimum, a business valuation will typically require five years of financial statements (if your business is incorporated) or five years of Statements of Business Activities if operating as a sole proprietorship.
An economic loss claim requires even more financial information if the business or individual has operated or provided services for longer than five years.
This post outlines the documents that assist an expert in providing an economic loss report or a business valuation report in Toronto.
When we develop calculations for an economic loss claim – whether in the case of a motor vehicle accident or a business interruption claim – one of the most important pieces of supporting information that we request are the company’s invoices.
Invoices serve to support several different components of the claim:
*It is not unusual for a company or individual to have not filed taxes in one of the years prior to the claim. Therefore, we need to support revenue levels with an alternative source of documentation. Invoices are the most reliable way to support a company’s annual revenue in the period prior to an accident or incident.
* If the company had unreported income on the financial statements or tax returns, then paid invoices can provide an alternative source of total revenue. It can time consuming for an expert to sort through and calculate revenue based on invoices provided so a client can save time and cost by summarizing the revenue from the invoices. The important information to include is the following: invoice #, date of the invoice, client, description of services provided, and the $ amount.
*Lastly, revenue obtained from invoices can simply serve to confirm the total revenue claimed on a T2 Corporate or T1 Personal income tax return.
Contracts for Future Business
At first glance the most recent financial statement for a company may not accurately portray the company’s revenue in growth in the next year or the next three to five years.
Therefore an important aspect of business valuation in Toronto and projecting future revenue is obtaining contracts in place at the date of business valuation and the date of incident. Consider a construction company that has bid for a development project that will increase company by revenue by 50% in the next three years. A business valuator in Toronto will have discussions with management to understand the additional labour (whether new employees are hired or subcontracted) and the material costs required for the project.
Documentation to support material costs for previous contracts can assist a business valuator in developing a forecast and budget for the new contract.
T4s Paid to Employees and Related Parties
Business valuators and damage quantification experts aim to arrive at a normalize earnings level of a company. One expense that requires a detailed examination is the management and administrative salary.
A common tax strategy for private business owners is to pay their spouse or other family members a nominal salary. It is important to keep a record of every individual paid by the company for at least the previous five years. This can include actual employees, but also related parties (children/spouse/other relatives) that did not have an active role in the company.
It is also important to keep a record of the services (if any) performed by the related parties. For example, a common scenario in a private business is a spouse providing administrative services to the company. It is important to understand the number of hours per week the spouse worked – because an adjustment to the salary may be required if they are providing 20 hours of service per week, but are being compensated as a full-time employee.
We have mentioned in previous posts a similar adjustment that is required for the owner/operator in a business valuation. The owner’s salary must be adjusted to market or economic rates and a business valuation report will require a summary of actual salaries paid to the owner. It is not unusual that the corporate fiscal year is different than the calendar year. Therefore, the valuator will prorate the salaries paid to employees and related parties to adjust for the fiscal year end dates.