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.
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.
23 Feb 2018 | Written by :
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Updated on April 27, 2023
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.
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.
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.
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 :
Dominic Chouinard is an expert in business sales and acquisitions at Raymond Chabot Grant Thornton....
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One significant component of wealth management is transferring your property at the time of death.
The objective of will and estate planning is to ensure that your property transfer is as straightforward as possible and maximizes the tax benefits. In practice, among others, planning serves to determine your personal and financial objectives to:
- Protect your heirs’ financial interests;
- Minimize taxes, administrative costs and delays;
- Ensure the smooth settlement of your affairs.
A will is undeniably the best way to set out your objectives and intentions.
Reduce your estate’s tax burden
The terms and clauses in this document will determine the parameters of your plan to transfer your property by setting out how it will be distributed to your heirs. You can, therefore, ensure that the people you choose are financially protected while maintaining overall wealth management.
By judiciously using the provisions in tax legislation, you can also reduce your estate’s and heirs’ tax burden. Depending on the type of property you own (real estate, private company shares, partnership units, registered plans [RRSP, RRIF and TFSA], investment portfolio, etc.) and what your will states, you can define strategies to meet your needs while maximizing the tax considerations.
Questions to guide your estate planning
The following questions could help guide your estate planning thought process:
- Do you have a will? If so, is it up-to-date?
- Have you listed all of your assets and liabilities (current and potential)? If so, are the lists recent?
- Have you determined who should inherit what? If so, do you want to make changes?
- Do some of your heirs have special needs?
- Will your estate have sufficient cash to cover the taxes payable at the time of your death and any cash legacies you may wish to make?
A careful analysis of your financial situation and defining an estate plan that reflects your wishes will avoid conflicts and confusion in settling your estate. Our will and estate planning experts can support you in the process to ensure that your planning is compliant and to provide you with peace of mind.
02 Feb 2018 | Written by :
Éric Dufour is a management consulting expert at Raymond Chabot Grant Thornton.
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Canadians who own real estate in the United States may be subject to estate tax. There are a number of factors related to such property that must be considered in order to fully understand what is involved.
Here are answers to some frequently asked questions our U.S. tax experts have received on this topic.
Q: What is the U.S. estate tax?
A: The U.S. estate tax is a tax that is payable by non-residents of the U.S. who own property in the U.S. at death. This estate tax is calculated on the fair market value of property located in the U.S. at the time of death.
Q: If at the time of my death I own real estate in Florida valued at $1,000,000, do I have to pay the U.S. estate tax?
A: For the year 2018, if the value of your worldwide estate is less than $11,200,000 (including your RRSPs), no estate tax is payable upon death. However, if the value of your worldwide estate is greater than this amount, you should consult a tax adviser from Raymond Chabot Grant Thornton.
Q: If at the time of my death, I own real estate in the U.S. but no estate tax is payable, do any U.S. tax forms still have to be filed?
A: Yes. The requirement to file form 706-NA is mandatory if, at the time of your death, you own property in the U.S. valued at over US$60,000.
Q: What is the best way to own real estate in the U.S. (condo/house)?
A: It all depends on the facts at hand, and as such, each case must be assessed individually. You should always consult your tax adviser before buying property in the U.S.
Q: Could other fees be payable at the time of my death if I own real estate in the U.S.?
A: Yes, probate fees could be payable to the State. Some planning options can make it possible to avoid probate fees.
Q: Should I prepare a mandate in case of incapacity if I own real estate in the U.S.?
A: The Canadian mandate in case of incapacity is not recognized in the U.S. You should therefore have a durable power of attorney which is recognized in the U.S.
Q: Should I amend my Canadian will if I own real estate in the U.S.?
A: In some cases it would be preferable to have a specific, English-language will for that property. Such a specific will could make it easier to transfer the property to the heirs at the time of death.
Do you have questions relating to U.S. tax issues? Our tax experts can help you.
25 Jan 2018 | Written by :
Mylène Tétreault is your expert in taxation for the Québec office. Contact her today!
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