Why is it a good time for an estate freeze (or re-freeze)?

Business Valuations


The days of the 2008 financial crisis seem far behind. Since then, we have seen tremendous economic growth—low unemployment, appreciating Canadian real estate, stock markets hitting all-time highs. Coupled with low cost of debt, your company’s valuation has skyrocketed in recent years. That is, until COVID-19 arrived and shutdown our economy. The past 3 weeks saw over 7.1 million CERB applications, magnitudes greater than the 2008 financial crisis. To put this in perspective, this represents over 30% of the workforce.

It’s a challenging time to be a business owner. With revenues down 50% to 100%, companies are making difficult decisions to lay off staff, defer rent, and slash overhead with the hope that the economy bounces back quickly. Companies rarely plan for a zero-revenue month.

It’s hard to find a silver lining in the midst of this global pandemic. Yet, this presents a once-in-a-generation tax planning opportunity for business owners. It is an ideal time to perform an estate freeze and defer taxes for many years to come.

Why freeze now?

The extent of the impact COVID-19 will have on private market valuations is currently unknown to many business valuators. As valuation is at a point in time, business valuators will likely be taking a conservative approach when valuing businesses during this period. What is known is that:

  1. The outlook for the rest of the year for most companies is uncertain. It only takes a few months of depressed revenue and high fixed costs to wipe out all cash flows. All things being equal, lower cash flows equal a lower business value.
  2. The COVID-19 crisis may negatively impact valuation multiples going forward. It’s highly unlikely a global pandemic was considered by investors when they assessed the risks associated with a business.
  3. Companies will face working capital pressure and increased leverage, which will negatively impact equity values and going concern.

The short answer is that the majority of businesses are likely to have a lower valuation today, compared to what they would have been valued at 3 to 6 months ago.

What if you recently froze the value of your shares?

Taxpayers who froze their shares within the last few years are likely “underwater” (meaning that the fair market value is below cost) and the holders of the common shares have a nil value.

Now is also a great time to consider an estate refreeze. In a refreeze transaction, the redemption price of the preferred shares is reduced to their fair market value, thus reducing the potential tax liability and deferring all future growth from this point on to the common shareholders.

How a Williams & Partners Valuations can assist.

Freeze transactions must be supported by valuation methodologies that are fair and reasonable given the facts of matter. Although a price adjustment clause may protect a taxpayer if the CRA challenges the valuation, to invoke it, a taxpayer must prove that their valuation is reasonable.

As the CRA may place more scrutiny on a freeze transaction with a low valuation, a valuation report prepared by a Chartered Business Valuator (CBV) will provide strong support to an estate freeze transaction.

Williams & Partners’ team of qualified Chartered Business Valuators (CBVs) have experience working at Canada’s largest independent valuation firms. Our valuation reports are prepared in accordance with Canadian Institute of Chartered Business Valuators (CICBV) standards.

Meet the Experts

To learn more about how our Experts can help, get in touch with Chris Jones CPA, CA, LPA, CFA, CBV