Step 1. Analyze the Balance Sheet: For example, it may be that a well-capitalized company has $600,000 retained as required capital in the balance sheet. In this hypothetical case, we would calculate a capital charge of perhaps 6%. or $36,000 against the income of the company. Subject to other factors.
Step 2. Normalize the Financial Statements: Meaning move all the assets to fair market value.
This ensures payments to self or related companies are at fair market value, and if not, then adjust. (Note the capital cost must be deducted)
Step 3. Value Normalized Net Income: This requires weighing and determining the multiple or number to be applied and why. This is where we apply the Position Papers and the “25 Factors Affecting Business Valuation” to produce the required valuation that is supported by unique facts related to the company as required in Point 7 of the Tax Act Policy Paper. This is the “utility” of the 25 Factors system that makes it unique, transparent, so accurate, and compliant friendly.