Corporate Finance in Atlantic Canada

Commentary on corporate finance issues for small- & mid-market private companies in Atlantic Canada

Archive for October 2011

What does the $25 bil shipyard contract mean for your entrepreneurial exit strategy?

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We’ve all of course seen and heard last week’s announcement of the $25 bil contract for the Halifax Irving Shipyard.

Many local NS businesses will be angling for a piece of the subcontract work … as well as being perhaps concerned about the impact on their own workforces.  See, for example, Ken Rowe’s (of IMP) statement in Allnovascotia “asking” Irving not to raid local small businesses for the various electrical, welding, etc trades that will be required for the big contract.

But I wonder if I’m the only one considering the impact of the contract announcement on the exit plans of Nova Scotia’s aging entrepreneurs?

Some could argue that with the expected impact on the NS economy and the increase in local business & consumer confidence, perhaps now is the time for entrepreneurs who have previously delayed their exit to consider selling.  After all, timing is key to the process of quietly marketing a business for sale, and now that the Halifax & NS markets are so upbeat about their future prospects, it can be argued that tapping into that rampant enthusiasm for the future could increase a prospective purchaser’s willingness to pay a higher price, as well as increasing the number of prospective purchasers (i.e. greater demand).

This contract announcement could, depending upon the industry, also increase the number of non-NS companies desiring a presence in Halifax and then deciding an acquisition may be the most effective (and timely) way of getting access to the perceived (or actual) boom about to hit Halifax.  We’ve actually seen this M&A trend in Newfoundland & Labrador in 2011 — a number of transaction announcements have specifically stated one of the reasons for the acquisition was to obtain access to the booming NL market, primarily St. John’s and Labrador.

It could also be argued that if I was in a business about to chase some of the Irving subcontract work, the future unknown potential today could perhaps be perceived today as more valuable than the reality of two years from now (if, for example, I were to fail to win any of that subcontract work).

When it comes to selling your business, timing is key … and last week’s announcement could make today perfect timing in Halifax.

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Written by Dan Jennings

October 28, 2011 at 9:45 am

Posted in CF Musings

Tech company to watch … Screenscape Networks in PEI

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http://en.fast50.ca/winners/ctwwinners~2/companiestowatch-winners

Congratulations to PEI’s Screenscape Networks on making Deloitte’s Tech Companies-to-watch List!

Written by Dan Jennings

October 21, 2011 at 11:34 am

Posted in CF Musings

Margolians in Truro closing

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http://www.ns.dailybusinessbuzz.ca/Provincial-News/2011-10-20/article-2781826/NS%3A-Margolians-shutting-down-after-almost-90-years-in-business/1

Margolians, an 80 year old retail staple in Truro, NS, is closing in January.   Changes in consumer spending habits, increasing competition and rising costs are all stated as the reasons.

Written by Dan Jennings

October 20, 2011 at 12:30 pm

New BDC loan fund, specifically for technology investments

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http://www.bdc.ca/en/about/mediaroom/news_releases/Pages/bdc_200_million_help_entrepreneurs_invest_ICT.aspx

Business Development Bank of Canada today announced a Canada-wide $200 mil loan fund to help small and medium-size entrepreneurs invest in technology.

Written by Dan Jennings

October 18, 2011 at 1:06 pm

Posted in CF Musings

The Chronicle Herald says “finding right buyer can be a challenge” … I disagree

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http://thechronicleherald.ca/Business/1268675.html

In today’s Halifax Herald, there is a story about the baby boomer retirement impact on business ownership and transition.  As with most such articles, the CFIB survey from 2005 is also quoted about 70% of entrepreneurs retiring within 10 years.

The reality is that while many boomers are retiring and selling their businesses, many of them are also not doing so on the above timeline.  There are various reasons (such as the recession’s impact on their retirement savings portfolio or the uncertainty of where they will invest the proceeds), but I believe the primary one is the emotional aspect.  It is a difficult issue for most entrepreneurs to consider selling their “baby” that they have built and grown over the years.  For entrepreneurs considering transferring the business to family members, there is the added complexity that perhaps the next generation can’t (or won’t) manage the business successfully.  There is an additional issue that financial buyers (see my earlier posts) can’t afford to pay a big premium for a small business, so some small businesses sell for relatively low multiples … and this encourages sellers to not sell until they absolutely have to.

Where I fundamentally disagree with the Herald article is the headline “But finding right buyer can be challenge”.  The reporter doesn’t appear to have consulted with any M&A advisors or business brokers (of which there are many in our city).  What I or any of my competitors would have told the reporter is that the opposite is true … for successful small businesses in most sectors, there are many more buyers searching than there are sellers.  Every month (sometimes more often), I am approached by a different buyer (or group of buyers) who are searching for a quality small or mid-market business to acquire … and they simply can’t find enough opportunities to consider … despite talking to all the M&A advisors and business brokers in town.

There are some sectors where the majority of these buyers aren’t interested, and perhaps that led to the reporting in the above article.  Restaurants and bars are common industries where the majority of buyers say they won’t considering acquiring an existing business.  This isn’t surprising given the relatively high failure rates for such businesses, although there are some operators who have developed the expertise to be successful in these sectors, and there are some buyers (but relatively fewer) for these types of businesses.

I’ll have to try to dispel the myth about buyers in my blog posts!

Written by Dan Jennings

October 15, 2011 at 11:01 am

Posted in CF Musings

Telephony deal

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http://thechronicleherald.ca/Business/1268459.html

Halifax-based Internetworking Atlantic has acquired Line 4 Communications, a designer/manager of integrated communications applications throughout Atlantic Canada.

Written by Dan Jennings

October 14, 2011 at 2:05 pm

How some large acquirers think, especially about earn-outs

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http://www.theglobeandmail.com/report-on-business/small-business/sb-money/valuation/a-candid-glimpse-inside-a-big-buyers-mind/article2126411/

This is an interesting Globe interview of an anonymous corporate development (i.e. M&A) executive at a large acquirer.

I don’t know the industry this executive operates in, but not all acquirers are as aggressive as his company at including earn-outs, at least to the “half of the deal” proportion that this interview mentions.  Some industries do, but many others don’t.

As the article discusses, earn-outs are problematic in two ways.  First, disputes sometimes arise because the purchaser is pushing down costs into the acquired target post-transaction, so the EBITDA (or some other “profit” definition) may vary from expectations due to “accounting issues.”  Second, there is a fundamental difference between the acquirer’s view that the vendor must be motivated to be part of the new team, and the vendor’s view that it is the purchaser’s responsibility to maintain and grow the business post-transaction (so that the vendor can receive the earn-out for what he/she sold).

Despite the concerns over earn-outs, they can be a way for vendors to obtain a premium price (or arguably ‘true market value’) for growth potential that is unrealized at the transaction date.  We also see earn-outs in situations where the vendor is key to the business and the purchaser has concerns about maintaining the customer base when the vendor is no longer the owner (or when he/she is retiring).  If a target business has customer concentration risk (i.e. a small group of customers represent a large portion of the revenue base), then an earn-out is often brought up by the acquirer as a way to counter the risk that those significant customers will leave post-transaction.

As the article says, including an earn-out is all about risk mitigation on the part of the purchaser, so it’s important for the vendor to understand what types of risk the purchaser is concerned about.

If you do negotiate an earn-out in your transaction, make sure you get good M&A and legal advice over the terms, particularly the definition of the profit base to be used in the earn-out calculation.  And remember that an earn-out is just one component of the overall price and terms of a deal — it should be taken in the context of the entire deal structure.

Written by Dan Jennings

October 13, 2011 at 4:41 pm

Posted in CF Musings