During a recent presentation on the valuation of businesses to a group of family law lawyers, we were discussing the various types of businesses that we get asked to value (i.e. sole proprietorships, partnerships and corporations) and were questioned whether or not a sole proprietorship actually has any value. While a number of sole proprietorships don’t have any significant value, it is something that should be explored especially in the context of family law. There are a number of issues and considerations in doing so and we have outlined these issues below:
Business Goodwill and Intangible Value vs. Personal Goodwill
The biggest factor to consider with the valuation of sole proprietorships is whether or not there is any value associated with the intangible assets and goodwill of the business. Intangible assets typically consist of reputation/brand value, customer relationships, and know-how (“secret formulas”). These factors typically enhance the overall value of the business, as they tend to generate higher revenue and profitability compared to businesses that do not possess them.
From a fair market value perspective, in order to be considered in the valuation of a business, the goodwill must be something that is transferable and therefore something that a potential purchaser would be willing to pay for. In most sole proprietorships, the owner is the heart and soul of the business and is often the only individual working in the business. In the majority of these situations, the business would not be able to operate without that owner and the goodwill of the business is therefore classified as non-transferable or “Personal Goodwill” with little to no value.
That being said, this isn’t the case for every single sole proprietorship. When we assess the fair market value of a sole proprietorship, we look to understand if there are specific saleable aspects that a buyer might be willing to pay for. These can include contractual arrangements, customer lists or even just goodwill value based on the profitability and nature of the business. Sole proprietorships can also have employees that may limit the reliance on the owner and this factor should also be taken into consideration.
Identification of Business Assets and Liabilities
Along with assessing the above, the most significant challenge in valuing a sole proprietorship is ensuring that all of the assets and liabilities of the business have been captured in the analysis. Given that operating results reported for income tax purposes are typically presented on the Statement of Business or Professional Activities (T2125 statement) and generally reflect only the revenues and expenses of the sole proprietorship, it is often necessary to perform additional procedures to identify and quantify assets and liabilities such as bank balances, accounts receivable, inventory, capital assets, and amounts owing to creditors and suppliers. In some cases, a sole proprietor may have assets that are commingled with personal assets, such as bank accounts. This commingling can create additional challenges in clearly distinguishing between assets required for business operations and those that are personal in nature. Establishing a balance sheet at the date of separation, is quite often the biggest challenge when valuing a sole proprietorship for family law purposes.
Quality of Financial Records
Somewhat related to the above, is the fact that the quality of accounting for sole proprietorships also tends to be below that of an incorporated business. As mentioned, because the reporting for tax purposes is limited to the revenues and expenses, some sole proprietors don’t use proper accounting software and may provide limited information to their accountant. We have seen a number of situations involving a “shoebox of receipts” which makes it very difficult to trace and understand the true nature of expenses being put through the business.
Income Tax Considerations
The last issue that we wanted to raise are the different implications from the taxation of sole proprietorships and this also applies to the valuation of partnerships as well. Due to the fact that sole proprietorships and partnerships are taxed at the individual level, there is no consideration of income taxes within the financial records of the business. As a result, the business valuator needs to assess the most likely buyer of the business and, if it is likely to be a corporation, factor in the corporate taxes that might otherwise be payable by the business if incorporated. This is a relatively straightforward exercise, but it is still a unique consideration for the valuation of sole proprietorships.
Closing
When dealing with entrepreneurs who operate as sole proprietorships the lesson is that one should not automatically assume that there is no value associated with the venture. It’s important to ask some questions, understand what all is involved with the business and then consider consulting with a CBV to get their thoughts on whether or not there might be some value after all.
February 2026
