With the gradual reopening of the economy, the mergers and acquisitions market is gradually recovering. What’s next?

Prior to the pandemic, the Canadian mergers and acquisitions (M&A) market was very stable and even on the rise. The Canadian outlook was very favourable for sellers. However, the pandemic caused disruptions in the M&A world, and several firms suspended or cancelled deals.

In a recent webinar, our experts discussed the current state of the market and their financing issue predictions with a special guest, Éric Doyon, Managing Partner at Walter Capital Partners.

Unprecedented economic impacts

Nine out of ten transactions were taken off the market or put on hold due to the lack of medium- and long-term financial performance visibility on companies, leading to global uncertainties and the preservation of cash resources.

There is no doubt about the need for every entrepreneur to be vigilant in this uncertain economy, but better days are ahead. With the gradual deconfinement of economic activity, businesses will be able to revisit their M&A plans and even take advantage of opportunities that may arise.

Proactivity and innovation: essential for recovery

In Canada, we are currently in the recovery and revitalization phase. With the reopening of the U.S. and Canadian economies, after a few months of crisis, we are already seeing some recovery in the transactional market.

In spite of the major difficulties encountered, some companies have proven to be resilient and others have shown strong growth. Several organizations, especially in the retail sector, were proactive, thinking outside the box and repositioning their Web activities, which, for some, drove a 200-300% sales increase. As a result, many are now re-evaluating their priorities in order to further invest in an online sales platform for future success.

Our viewpoint: our predictions for the future

We are seeing some demand in the market and are already witnessing the resumption of transactions, leading to business continuity. With entrepreneurs’ confidence and a more optimistic outlook, including the recovery of North American stock exchanges, as well as several attractive business opportunities, the M&A market will gradually pick up again.

However, we expect a change in the structure of transactions, as selling price values and earnouts will become increasingly common. It is still not certain what role the effects of COVID-19 will play in lenders’ and investors’ analyses. They will possibly be more careful in selecting transactions, but, to date, these partners have been very flexible in order to support entrepreneurs, despite the context.

As mergers and acquisitions gain momentum, investors and lenders will continue to focus on companies with strong management teams and a proven business model operating in growth sectors. Entrepreneurs will therefore have to demonstrate how well the company and the management team navigated through the crisis, mainly in terms of agility, flexibility, cost control and loyalty.

On the other hand, an entrepreneur who decides to sell today must approach this step with a certain open-mindedness. Valuations will be under pressure, since we are seeing a decrease in the available leverage in transaction structures, which will require much more operational and financial creativity.

We remain optimistic about long-term transaction volumes. With the pandemic stabilizing, many buyers will be ready to do business: there is still a lot of capital available in the market. However, it is important for an entrepreneur to avoid making hasty operating decisions that would maximize short-term profits and transaction value at the expense of long-term value creation.

Please view our webinar for more information on the return of M&A and financing.

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The Grant Thornton International IFRS team has published COVID-19 – Accounting Considerations for CFOs: Government Grants.

As a response to the COVID-19 global pandemic, governments around the world are implementing measures to help businesses and economies get through it. The nature of government grants can take on various forms, such as below market rate loans, short-time working subsidies, relief funds, income-based tax credits, to name just a few.

While many forms of government assistance should be accounted for by applying IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, others should be addressed by other standards, such as IAS 12 Income Taxes. Entities will therefore need to assess the economic substance of any government assistance they are receiving to determine what is the appropriate accounting treatment.

The publication COVID-19 – Accounting Considerations for CFOs: Government Grants addresses four key questions to consider prior to determining the appropriate accounting treatment for government grants:

  • Is the government assistance in the scope of IAS 20 or another standard?
  • What is the correct recognition and measurement?
  • Is it recognized in the correct period?
  • How should the assistance received from governments be presented in the financial statements?

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The International Accounting Standards Board (IASB) has issued a collection of narrow scope amendments to IFRS. The collection includes amendments to three standards as well as Annual Improvements to IFRS Standards, which addresses non-urgent (but necessary) minor amendments to four standards.

The changes are summarised in this Adviser Alert.

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Christiane Caisse
Senior Manager | CPA, CA, M. Sc. | Financial advisory

Costing improves profitability and is therefore of paramount importance for any business, including service companies. This is particularly true in these times of uncertainty.

Like manufacturing companies, service companies are constantly evolving and will need to arm themselves better than ever to stay the course and consolidate their operations in order to face the uncertainties of the coming months. Managers must have all the information they need to make informed decisions and ensure the company’s financial performance.

By definition, costing is the sum of all expenses needed for producing a good and finalizing a service.

Establishing costs for informed decisions

There are several advantages to knowing and controlling the cost of your services, such as:

• Determining the sales price of services;
• Making informed decisions about contracts (because in negotiations with the client, the manager is better able to understand the available margins);
• Recognizing the difference between profitable and non-profitable services.

In many companies, costing is a neglected management tool, either because of lack of time or lack of knowledge.

As a result, many managers navigate rough waters and cannot rely on costing in the many strategic decisions they must make.

Here are some points indicating that you would need to update or review your costs:

  • You have had to review your priorities because of the pandemic;
  • Your costs were last updated more than a year ago;
  • Significant changes were made within your business;
  • Your range of services has increased and you don’t know how to price your new services;
  • You’re not sure you included all of the relevant costs in your costing;
  • Your profit margin does not reflect the estimated profit margin at the time of a tender.

Calculating costs

To evaluate the cost of a service, you have to understand that it is composed of several elements:

  • Salaries;
  • Subcontracting;
  • Operating costs;
  • Sales expenses;
  • Administration expenses.

When determining your costs, one of the most common pitfalls is to evaluate a resource’s hourly rate based on hours worked rather than taking into account productive hours (vacation and other days off, breaks and training).

For example, if we take an employee with a $25 hourly rate including benefits, this is equivalent to an annual salary with benefits of $52,000 per year. This annual expense, based on the number of productive hours per year ($52,000/1,660 hours in our example), gives us a productive hourly rate of $31.33. It is this rate that should be taken into account when assessing a service contract and not the $25 hourly rate.

When assessing your services, you will be confronted with several traps . One of the most important ones to avoid is postponing the project or waiting for 100% accurate information to determine the cost price. Remember that, like your company, costing is a constantly evolving process.

22 Jun 2020  |  Written by :

Christiane Caisse is your expert in Financial advisory for the Sherbrooke office. Contact her today!

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