Corporate Finance in Atlantic Canada

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

Archive for the ‘CF Musings’ Category

Different types of buyers

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In general, there are 3 groups/types of buyers for mid-market private businesses:

  1. Strategic.  Such buyers are often called industry buyers because they are typically in the same (or related) industry as the target.  These buyers tend to be larger companies seeking to consolidate your business with their existing operation, and so, they often have access to synergies from combining the two businesses.  These synergies can mean that such buyers can afford to pay more than the below types of buyers (i.e. they can pay a strategic premium over/above standalone financial value).  These buyers are often an option for mid-market businesses and less so for small businesses, but that can depend on the industry.
  2. Financial.  Financial buyers are aplenty in the Atlantic marketplace, given the prevalence of debt and equity capital.  These buyers have access to capital and either financial or management expertise, but aren’t currently operating in the industry of the target (and therefore don’t have synergies to allow them to pay the above premium price).  Such buyers range from formal private equity funds (such as the Sobeys/McCain-founded SeaFort Capital), to informal groups of owners seeking to invest in businesses and their management teams, to individuals who have a dream of being an owner (and have never acquired a business before).  In today’s market, there are many more financial buyers than business opportunities, and so these buyers/investors are looking in almost all industries and sizes in Atlantic.
  3. Management.  Existing employee or senior management groups have always been an option to acquire your business.  Historically, the challenge was often that such buyers didn’t have capital, and so often required significant vendor financing assistance.  In recent years, that is no longer the case, due to the availability of capital (both debt and equity) to assist management teams in acquiring the businesses they work for.  While management buyers can’t do the above strategic price, they can pay a fair price and therefore are a credible alternative.

Stay tuned for more blog entries on each type of buyer.

Written by Dan Jennings

June 12, 2019 at 9:23 am

Business succession in NL

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https://soundcloud.com/vocm/sept-1st-greg-london-dan-jennings-of-bdo-valuing-your

On a recent VOCM radio show in NL (hosted by BDO partner Nancy Snedden), tax colleague Greg London and I talk in-depth about the challenges of business succession in NL.  We covered a wide variety of topics, such as demographics, taxes, the buyer landscape and more.

Written by Dan Jennings

October 26, 2018 at 1:34 pm

Do the federal tax proposals change your plans to sell?

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If you’re the owner of a private company in Canada, you should be concerned about the federal government tax changes that were proposed on July 18 (starting a 75 day consultation period).  These proposals (if enacted) will take away many of the income splitting tax planning opportunities available to entrepreneurs and their families.  One investment advisor we know has modelled out that these changes could reduce his clients’ investable assets in retirement by 40%!

See here for my firm’s overview of the proposed tax changes:

https://www.bdo.ca/en-ca/insights/tax/tax-alerts/a-detailed-review-the-government-private-company-consultation-paper/

If you’re a business owner who is considering selling your business in a few years, you should be even more concerned!  Many of you have established a family trust to own your shares and multiply the use of the lifetime capital gains exemption (LCGE) amongst your family members (assuming you have a business worth more than $830,000).  However, one of the proposed changes is to eliminate these tax savings that use family trusts … meaning, if you sell after 2017 (proposed), you could get 1 LCGE when you sell your business, not multiple … and since each exemption is worth approx. $225,000 in tax savings, some of you are going to pay much more tax that you thought when you sell.

I’ll leave that up to each of you to determine whether that changes your plans as to when you sell your business. There are some options for ensuring that you utilize the maximum LCGE available to you this year, rather than you having to sell this year (before these rules come into force).  Remember our tagline … One day, we will all sell our businesses, either voluntarily or involuntarily.  Unfortunately, one of the involuntary reasons to sell could be a changing tax regime.

If you believe (as I do) that business owners should be treated fairly in terms of taxes (but that doesn’t mean equal to that of employees), please contact your own local MP.  See below for the text of my message to my own MP.

The tax changes proposed by your minister Morneau in July will have a devastating impact on small business owners.

It is simply not “fairness” to compare the income of an employee to that of a small business owner … the employee doesn’t have fluctuating income, he/she didn’t invest capital to start the business, the employee has benefits like sick days and (often) a pension … the list of differences goes on and on.

And the government spin that this is about closing “loopholes” for the wealthy is simply incorrect.  The tax planning being disallowed here is a fundamental part of the planning for small business owners who form a part of the middle class in this country.  To be clear, getting rid of dividend “sprinkling” for million dollar business owners will not significantly impact those owners because most of their income is being taxed at the high rate already, but for the small business owner making $100-400,000/year, it will be a huge increase in taxes.

Does your government want mobile professionals (like doctors) leaving the country because you dramatically increased their overall tax rate?  Does your government want entrepreneurs to give up starting a business because they’ll pay over half of their income in taxes?

Written by Dan Jennings

August 21, 2017 at 3:07 pm

Some things you can do to get ready to sell your business

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What we’re seeing most often today is that most small business owners don’t have a succession plan nor are their kids interested in taking over the business.  So, those business owners will need to sell their businesses in order to crystallize their wealth for retirement.  At our “Create a Bidding War for the Sale of Your Business” seminars, you’ll learn some of the things to focus on in advance of when you want to sell, such as:

  1. Take some time off as the owner – demonstrate to prospective buyers that the business can run without you (by showing that you go on vacation regularly, for example).
  2. If you are the primary contact for new & existing customers in your business — consider hiring a general manager or sales manager.  While that salary will reduce your cash flow, the overall multiple you’ll receive will be higher, resulting in a higher price when you sell.
  3. Create (or document if you already have it) some recurring revenue in your business — buyers will pay more for monthly recurring revenue.
  4. Ensure your tax planning is optimized — utilize techniques such as family trusts to maximize your use of the lifetime capital gains exemption to increase your after-tax proceeds.
  5. Don’t give your financial statements to a prospective buyer — those financials are not intended to show your business in the most favourable light, so by themselves they won’t help yield the best price and terms.

Consider attending our “Create a Bidding War for the Sale of Your Business” seminars this month in St. John’s (July 24) and Halifax (July 28).  Register below:

http://event.bdo.ca/events/create-a-bidding-war-for-the-sale-of-your-business/event-summary-464f2846b755405ca143f5e40275940c.aspx

http://event.bdo.ca/events/create-a-bidding-war-for-the-sale-of-your-business/event-summary-5b5b6057ea2847f796ccdbd71973b012.aspx

Written by Dan Jennings

July 5, 2017 at 1:26 pm

Posted in CF Musings

The Six Components of an LOI

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https://www.divestopedia.com/2/895/sale-process/letter-of-intent/you-received-a-letter-of-intent-now-what

From this Divestopedia article, here are the six components of a letter of intent (LOI) when selling your business:

  1. Identifies the buyer
  2. States the type of transaction
  3. Documents price and consideration
  4. Describes the conditions of the offer
  5. Outlines the buyer’s plans for due diligence
  6. Specifies the timing and closing steps.

Remember that most LOIs are non-binding, so the deal is not done just because you’ve signed an LOI.

Written by Dan Jennings

March 14, 2017 at 8:39 am

Posted in CF Musings

5 Elements of a Successful Business Exit

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Below are five required elements for planning and executing a successful business exit.

  1. A plan based on the owners’ objectives.  Talk to your advisor about mapping out possible scenarios and options that align with your goals.  This doesn’t have to be in writing, but walk through the scenarios with an advisor.
  2. Work with an experienced team of advisors.  Accountants, M&A professionals, lawyers and investment advisors should be part of the exit planning process.
  3. A good understanding of business value.  Work with a valuator or M&A professional to understand how the market will value your business.  Do this in advance so that you can discuss any improvements that can boost the value.
  4. Hire a management team.  All other things being equal, a business with an existing management team is more valuable than one without.  Every buyer wants to know that the business can survive (and thrive) when the existing owner retires, and having an existing management team is the best way to prove this to a buyer.
  5. Time.  Allow for planning time in advance of when you want to retire/sell.  The process can take time, but especially if value improvements and/or tax strategies need to be implemented first.

According to some sources, anywhere from 67-90% of businesses listed for sale fail to get sold.  Developing an exit plan using the elements above can improve those odds.

Written by Dan Jennings

November 28, 2016 at 2:00 pm

Continuing high M&A levels in the SME space

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bdo-ma

The attached slides from one of our recent M&A presentations highlights the reasons for the continuing high levels of M&A activity in the small & medium-size business space:

  1. there is no shortage of capital available;
  2. historically low cost of capital (both debt & equity);
  3. lack of organic growth in the economy;
  4. baby boomer demographics (and the lessening of internal family business succession).

In our view, these key indicators point to elevated levels of M&A activity in the near- to mid-term.

Written by Dan Jennings

October 2, 2016 at 4:14 pm