The sale of a business is generally one of the most important transactions of an entrepreneur’s life, and often, the most complicated. Moreover, when this is a family transfer, the transaction could be even more sensitive, given the emotional aspects involved that can influence the sales price.

In any business transfer, “the” big question that keeps coming back is: “How much is my company worth?” The challenge is to determine a price that reflects the fair value of the SME, which satisfies both the transferor and transferees, and that ensure the business’s longevity.

This is why it is essential to establish the business’s value with a thorough, objective and structured process.

Avoid conflicts

For entrepreneurs who dedicate their lives to building their SME, transferring it can be a painful, emotionally charged experience. Also, as they rely on the proceeds from the sale to fund their retirement, in their eyes, their business is worth a lot of money…sometimes more than its fair value.

If they have children, entrepreneurs usually want them to take over the business, but this is where two perspectives and two realities may collide. On one hand, entrepreneurs want to get the most money possible for their SME. On the other hand, the acquisition of the family business is a major investment for the children; do they have the financial means? For the children, the value of the business equals their ability to pay.

These issues could cause resentment and tensions within the family. Using the services of an expert who can give transferors and transferees a fair and neutral opinion about the value of the business, can reduce the risk of conflicts. Furthermore, this ensures a fair treatment for the children who will not be involved in the business after the transfer.

Main traps to watch out for

Business valuation can include several traps. How many times have we heard entrepreneurs propose unbelievable amounts about the value of their SME!

Numerous entrepreneurs tend to use a market-based valuation method. One of the most popular calculations, based on transactions of comparable businesses, consists in multiplying earnings before interest, taxes, depreciation and amortization (EBITDA) by a multiplication factor.

The problem is that transferors tend to overestimate this factor, by relying on hearsay because it’s difficult to obtain reliable information about comparable transactions. In fact, unlike real estate transactions, there is no register where the sale prices of businesses are recorded.

Instead, business valuation experts prefer a performance- or earnings-based valuation method, which essentially relies on the business’s ability to generate earnings. This method therefore procures a more precise measurement of the SME’s fair value.

A few other key points to consider when evaluating a business

  • Don’t forget any assets or liabilities.
  • Take into account capital investments required to support the business’s activities.
  • EBITDA does not include interest on debt. Therefore, don’t forget interest-bearing debt in the calculation of the business’s value.
  • Consider unusual salary adjustments and performance bonuses that might have influenced EBITDA in the course of the last year.
  • Do not count the economic benefit for the business of owning a building twice. If you assess based on earnings and the business owns its building, the economic benefit of this asset is already included in earnings (since the business does not pay rent). Don’t duplicate its value by adding the building’s value to that of the business’s activities.
  • Take the time to perform a due diligence review before buying a business, that is, one that draws up a detailed portrait of the company’s financial, commercial, legal and operational aspects.
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One last tip

Above all, do not try to sell the business to your children if they don’t have the financial ability to buy it at its fair value. Consider other solutions that would benefit all. For example, you could use the proceeds from the sale of your SME to help your children start up a new business or invest in other projects with them.

Would you like more information about the business valuation process? Don’t hesitate to contact our experts. They will be pleased to help you.

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Martin Deschênes
Partner | CPA, CA | Financial advisory

Are you looking to stimulate the growth of your SME by acquiring another business? Now that’s an exciting project! However, in order to reap the benefits, it’s best not to skip steps and seek out the guidance of expert advisors throughout the entire process.

Do you think you know all about the business in question? Do you feel the need to act fast because you’re scared of missing out on a unique opportunity? Be careful: there could be skeletons in this business’s closet or the salesperson’s statements could be false; to find out the truth, a thorough due diligence should be performed. You wouldn’t want any nasty post-transaction surprises!

Another determining aspect of a successful transaction: the integration of the acquired business’s activities and employee engagement, because while the purchase may be complete, the work is not.

Here are five tips for success to reducing risks to a minimum and getting the most out of your investment when acquiring a business.
ns conflits

1. Letter of intent to purchase

The purpose of this document is to serve as a basis for negotiations, without being a formal offer to purchase. Rather, it is a commitment between two parties to negotiate in good faith. As a buyer, you’re stating your intention to acquire the business according to certain conditions that were discussed in preliminary discussions.

The letter of intent establishes in particular:

  • The sales price and possible adjustments;
  • Assets included in the transaction and liabilities assumed;
  • Terms of payment and certain representations and warranties.

It is essential, as of this step, to properly establish the terms and conditions of the transaction. Do not under-estimate the importance of this document.

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2. Due diligence

This too is a crucial step. When properly executed, with the help of specialists, it allows you to know just exactly what you’re purchasing.

Due diligence provides you with a detailed look at the financial, tax, legal and operational aspects of the organization involved, as well as the main transaction risks.

Among other things, it helps validate information provided by the seller and protect you from unpleasant surprises. It also helps detect any of the acquired entity’s business issues and those relating to the integration of activities (obsolete computer systems, possible departure of key employees, etc.).

This verification process can certainly be demanding, but trust me when I say: all those entrepreneurs who took the time to do this step don’t regret it. Moreover, due diligence can sometimes help lower the purchase price.

3. The purchase agreement

You now have an accurate idea of the business you want to buy. You’re ready to sign a purchase agreement containing the conditions and warranties that will protect you from various risks, in particular, those detected during due diligence. For example, you can include in the agreement indemnity, confidentiality, non-solicitation and non-competition clauses.

Plan ahead: a well detailed purchase agreement prepared by an expert can help you save a lot of money and offer you adequate protection from the most significant risks.

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4. Achieving synergies

We’re not done yet! There’s still much work to be done for the transaction to yield the desired results.

As a matter of fact, you need to implement a well-prepared integration plan. Do it quickly: integration should not take more than two years to produce the expected synergies.

Make sure to properly merge the operation method and the information technologies of both businesses. Often, incompatible IT systems can be a costly failure.

Carefully analyze how things are done within the purchased company. Perhaps certain corrections need to be made, but the best practices could be deployed within your group.

You might also want to involve the people in charge of the transition as early as the due diligence step to enable them to get a better understanding of quick integration issues pertaining to the process.

5. Employee engagement

The success of your integration plan depends on your employees’ engagement. After all, they will be the ones to implement it!

Engage all of your employees by sharing your vision and the values you hold dear, in order to create one common business culture. Explain your objectives and how you intend to attain these goals.

Furthermore, provide your key employees, including those from the acquired business, with advancement opportunities. This is one of the best ways to motivate them.

The HUMAN aspect is a key factor behind every successful acquisition.

Are you thinking about acquiring a business? Don’t hesitate to contact our experts. They will be more than pleased to assist you in this major step of the growth of your business.

22 Feb 2018  |  Written by :

Mr. Deschênes is a partner at Raymond Chabot Grant Thornton. He is your expert in Transaction...

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Adviser alert–February 2018

The Grant Thornton International IFRS team has published the 2017 version of IFRSs Example Consolidated Financial Statements 2017 (hereinafter the “Example consolidated financial statements”).

The Example consolidated financial statements have been updated to reflect changes in IFRS that are effective for the year ending December 31, 2017. Further, they reflect an illustrative corporation’s decision to early adopt IFRS 15 Revenue from Contracts with Customers and Clarifications to IFRS 15. No account has been taken of any new developments after October 31, 2017.

Example consolidated financial statements – summary

The example consolidated financial statements are based on the activities and results of the illustrative corporation and its subsidiaries – a fictional consulting, service and retail entity – that has been preparing IFRS financial statements for several years.

The form and content of IFRS financial statements depend on the activities and transactions of each reporting entity. The Grant Thornton International IFRS team’s objective in preparing the example consolidated financial statements is to illustrate one possible approach to financial reporting by an entity engaging in transactions that are typical across a range of non-specialist sectors. However, as with any example, this illustration does not envisage every possible transaction and, therefore, cannot be regarded as comprehensive.

Management is responsible for the fair presentation of financial statements and, therefore, may find other approaches more appropriate for its specific circumstances.

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Simon Julien
Lead Senior Director | B.B.A. FPAA | Financial advisory

The property and casualty (P&C) insurance market had a turbulent year in 2017. This article takes a look at the potential impact of risks in 2018 and looks at options to minimize them.

In the second half of the year, extreme weather was widely covered in the media, and rightly so. It’s estimated the damages in the wake of hurricanes Harvey, Irma and Maria and forest fires in California could surpass US$135 billion and will exert pressure on the North-American re-insurance market.

After a flurry of insurance company mergers and acquisitions in the past five years, several transactions affected the Regroupement de cabinets de courtage en assurance in 2017.

Legislative changes

Bills 141 and 150 will likely change the business practices of insurers and market intermediaries, particularly in terms of the business relationships between brokers and issuers and the marketing of P&C insurance products. Federally, Bill C-45, on legalizing marijuana, is causing some concern with insurers.

According to MSA Research, first quarter underwriting revenues for Canadian insurers were down from the same period in 2016: the first quarter of 2017 posted a loss of $3.7M, compared with a $616.8M gain in the same period in 2016.

In recent years, favourable insurance market conditions allowed companies to renew their insurance programs somewhat informally—this may change in the future. The current insurance and re-insurance market is such that businesses face an increased potential of changes in rates, coverage and terms and conditions.

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Growing risks

The year 2017 saw the emergence of new risk exposures for businesses:

  • Cyber crimes (e.g.: the Wannacry ransomware);
  • The impact of workplace harassment (e.g. the Harvey Weinstein affair);
  • Technological innovations (e.g. artificial intelligence, blockchain, drones and driverless cars);
  • The sharing economy.

To limit the dangers of current insurance market trends and offset the potential impact of emerging risks, companies will need to adopt a more rigorous process when renewing their P&C insurance program. The process should provide for:

  1. Monitoring and understanding insurance market trends;
  2. Determining and evaluating current and developing risks;
  3. Efficiently analyzing insurance coverage and the targeted risks and determining any adjustments needed;
  4. Determining uninsured risks and implementing an mitigation action plan;
  5. Assessing the insurance program claims ratio;
  6. Undertaking an in-depth and relevant update of underwriting data;
  7. Assessing the insurance provider’s financial soundness and the quality of the insurance broker’s services;
  8. Setting out renewal objectives in terms of rates, improved coverage and service quality for both the insurer and broker;
  9. Setting a renewal strategy (negotiation or call for tender) based on defined objectives.

Implementing a rigorous renewal process will improve integrated risk management by factoring in the thoroughness required to ensure that current and developing risks are adequately reflected in the insurance program.

20 Feb 2018  |  Written by :

Mr. Julien is your expert in financial advisory for the Québec office. Contact him today!

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