The real number is what a business actually earns under normal operating conditions; the tax number is the lower figure reported to the CRA after legitimate deductions, and the gap between them is the story a buyer needs to understand.

Most owner-managed businesses are managed to minimize taxable income. Owner compensation is structured to reduce corporate profit. CCA is claimed at maximum rates. Discretionary expenses are run through the corporation. The result is a tax return that shows modest earnings, appropriate for CRA purposes, but not representative of the business’s actual economic performance.

In a transaction, the buyer values the business on its real earnings, the normalized EBITDA that reflects what the business earns under market-rate ownership and typical operating conditions. Bridging from the tax number to the real number is the normalization process, and every step of that bridge needs to be documented and defensible. A seller who cannot clearly articulate the difference between the tax return and actual earnings, with supporting evidence for each adjustment, will see a buyer apply their own, typically more conservative, normalization.

The gap between the tax number and the real number is where enterprise value lives. See how Wefinx approaches exit planning.

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