Corporate Finance in Atlantic Canada

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

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Cash conversion cycle

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http://liquidcapitalcorp.com/blog/use-formula-determine-companys-cash-conversion-cycle/

Above is an interesting article from Liquid Capital on working capital, specifically how to calculate the number of days it takes your business to turn inventory into cash (“cash conversion cycle”), which can be used as a key performance indicator in your business.  Essentially, the number of days you hold inventory (on average), plus the number of days it takes you to get paid by your customers, less the number of days it takes you to pay your suppliers.  You’ll be surprised at how many days is in your cash conversion cycle.

In my experience, this is a big issue in Atlantic Canadian small businesses, i.e. businesses have far too much of their cash tied up in working capital.   Did you know that we have one database that says the average receivable collection period (across all industries) in Atlantic Canada is 93 days?!

It takes discipline to get working capital investment down, but it can be done (over time and hard work).  And it is a way to get more cash out of your business, plus it will make your business more valuable when you want to sell it.

Written by Dan Jennings

March 7, 2017 at 11:29 am

Posted in Uncategorized

Central Building Supplies sold to Kent

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http://www.cbc.ca/news/canada/nova-scotia/sale-building-supplies-business-change-1.3874402

Antigonish, NS-based Central Building Supplies is being sold to Kent Building Supplies.  Owner Steve Smith is selling his 7 locations to Irving-owned Kent, effective Jan 1.

Another example of strategic buyer consolidation in an industry.

Written by Dan Jennings

December 3, 2016 at 2:49 pm

NewNet sold

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https://news.samsung.com/global/samsung-acquires-rich-communications-services-business-from-skyview-capitals-newnet-communication-technologies

Bedford, NS’s NewNet Communication Technologies has been sold to technology giant Samsung.  NewNet is a provider of “rich communications services” to mobile data networks.

Originally named NewPace, NewNet was acquired by Skyview Capital in 2014, who have now sold it to Samsung.

Written by Dan Jennings

November 16, 2016 at 8:17 am

Many more buyers than sellers

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The last 4 times we’ve gone to market in Atlantic Canada with a small/medium-size business (what we call a “sell-side auction”), we’ve achieved on average 8 offers for each business.  While we knew the market was strong, this level of interest surprised even us!

The decision to sell is a personal one for small & medium-size business owners (often family-owned), but one of the considerations is market timing.  And given the amount of buyer interest across Atlantic Canada, the market is ripe for sellers … resulting in higher prices and lower amounts of vendor financing.

We’ve been saying for some time that there are many more buyers than sellers for quality businesses … but now we’re seeing 8x more.

Written by Dan Jennings

May 2, 2016 at 8:35 am

Posted in Uncategorized

Business valuation is much more than financial statements

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When we’re starting a business valuation assignment, we are often asked why we want a relatively long list of information (i.e. much more than just five years of year end financial statements).

The reason we ask for a collection of financial and non-financial information is that a business valuation is attempting to predict how the market will value the business, and the buyers in the market don’t just consider the financial statements.

The value of a business is driven by 3 primary factors:

  1. Annual cash flow.  Every buyer asks for the last 5 years’ financial statements, but history is only a guide to the future.  In addition, historical cash flows have to be normalized for non-recurring or discretionary items.
  2. Multiple or rate of return.  How the market perceives risk in that cash flow stream impacts the multiple to apply to that cash flow.  While there is no such thing as a risk-free business, the market perceives different levels of risk in different industries (and even within the same industry), and that qualitative risk assessment has an impact on value.
  3. Capital.  How much capital will be required to buy and operate a business is critical to the price a buyer can afford to pay for a business.  For example, high inventory levels that may not be all financeable by an operating line will mean a buyer will need more equity to finance inventory, and that will impact price/value.

If your accountant is valuing your business by only considering the financial statements, then perhaps you should have a discussion with a valuation/M&A advisor.

Written by Dan Jennings

July 23, 2015 at 5:24 pm

Is now a good time to sell your business?

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As M&A advisors, we get asked this question a lot … “is now a good time to sell my business?”

The answer is yes … for example, the last two businesses we’ve sold in NS yielded an average of 9 offers each (signs of a very strong M&A market!).

But the timing still has to work for you and your family.  If you’re 50 years of age selling a small business, the market will typically not yield a high enough price to warrant you giving up the stream of profits from the business (unless you have other income-generating things you want to do after selling).  Of course, that assumes you don’t have health or other issues that could prevent you from operating the business for the next 10 years.

If, however, you are closer to retirement age and want to crystallize the value in your business, the market is very strong right now.  For quality small and mid-market businesses, we estimate there are at least 10 buyers for every seller.  That means a general rise in pricing, but also an improvement in terms (such as lower amounts of vendor financing).

Written by Dan Jennings

July 20, 2015 at 3:54 pm

Selling auctions actually do work

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When we discuss the local M&A market with clients and target clients, they are often surprised when we tell them that there are many more buyers than sellers for small & mid-market businesses (SMEs).

Every month, we are approached by at least one new buyer who hasn’t been able to find a quality business for sale.  In addition, most financial institutions have excess capital they need to place in order to generate sufficient returns for their shareholders.  Finally, the rise of private equity funds (both formal and informal) as pools of capital have also increased the demand for deals.

This means that when we sell a business, we don’t approach one buyer at a time … we create a ‘quiet and controlled’ auction that brings multiple prospective buyers through a process that forces them to pay the best possible price and terms (because if they don’t, another buyer will).

Given the activity in the market in Atlantic right now, if you’re selling your business without talking to more than one buyer, we’re very confident in saying that you’re not getting the best possible deal.

Written by Dan Jennings

July 17, 2015 at 10:16 am