Author Segal LLP

Preparing for a Liquidity Event

The success of a liquidity event involving a privately-held business requires considerable preparation.

Even in circumstances where a sale is not imminent, much can be done to improve the operational and financial performance of a business in order to ensure owners can capitalize on favourable market conditions and execute their liquidity option when the timing is optimal.

Even if a liquidity event not be expected to occur for many years into the future, business owners will end up benefitting from owning a company with reduced risk and better operating and financial performance.

The following outlines the main areas of focus for business owners contemplating a future liquidity event:

Know the Value of the Business

Even if there are no plans for an imminent sale, it is important that business owners have a reasonable estimate of their company’s value.

When armed with this knowledge, owners will be better positioned to evaluate unsolicited offers by potential investors. Additionally, obtaining a periodic, realistic estimate of value serves as a tool to examine changes in value over time and is a means to target and track growth objectives.

Relying on a value based on pricing obtained in transactions involving similar companies may lead to value expectations that are unrealistic in an open market transaction. It is worth retaining an experienced Certified Business Valuator to get an accurate and unbiased valuation based on the financial and non-financial, tangible and intangible factors specific to your business.

Understand the Value Drivers

Along with an estimate of a realistic value range, it is important to understand the factors driving this value.

Value drivers consist of financial and non-financial metrics and intangible attributes that are of importance to prospective purchasers. They are also the catalysts to increase the future value of a business prior to any liquidity event. Identifying value drivers will allow owners to focus on enhancing areas that are deficient, resulting in better financial performance, lower risk and, ultimately, a higher value.

Prepare for a Liquidity Event

Optimizing a liquidity event involves timing the transaction to coincide with favourable company and market conditions.

Much preparation can be done to ensure owners are ready to capitalize on attractive market conditions, including the following:

• Reducing key man risk through the development of a strong senior and mid-level management team;

• Reducing customer and supplier concentration;

• Investing in maintenance and capital expenditures to ensure productive capital assets;

• Improving financial systems and reporting capabilities;

• Documenting undocumented business relationships with customers, suppliers, employees and related parties, as well as internal operating controls and governance protocols;

• Obtaining resolution and greater clarity relating to contingent liabilities, outstanding tax and litigation matters;
• Cleansing the balance sheet of redundant assets;

• Developing a growth plan based on sound business strategy and detailed financial assumptions

Successfully implementing the above initiatives will increase profitability while reducing risk and costs to potential buyers thereby increasing the attractiveness, marketability and ultimately the value of the company.

Consult With a Transaction Advisor

Liquidity events are unusual in the business lifecycle and therefore an area where management typically has limited experience. Given the significance of the process to the business owner, it is prudent to hire an advisor to ensure the outcome is maximized.

However, even business owners experienced with the transaction process can benefit from engaging a transaction advisor prior to initiating a liquidity event. These benefits include:

• Signalling that the process will be professional, pragmatic and unemotional;

• Advising on the purification of the balance sheet prior to the transaction to ensure overall value is maximized for the business owner;

• Advising on the optimal transaction structure (full sale, partial sale, management buy-out, sale to family members, etc.) and process that will yield the best outcomes for the business owner; and

• Outsourcing the responsibility for overseeing and managing the transaction process maximizes the efficient use of management’s time and enables them to focus on the day-to-day operations and growth of the business.

This is the first in a series of articles by Nathan Treitel on transactions and valuation issues relating to small and mid-sized privately held companies.

The next article will focus on liquidity and financing alternatives for privately held businesses.

This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.

Commentary on the 2019 Federal Budget

Dear Clients and Friends,

On March 19, 2019, the federal government released the budget for 2019.

This budget was not focused on corporate tax issues. Instead, the budget provided for a few directed measures for individuals with regard to re-training and purchasing a home. There were no changes to corporate or personal tax rates.

Please follow the link below to a summary of the budget presented by our Tax Team.

Federal Budget Commentary 2019

If you have any questions, please do not hesitate to contact your Segal tax advisor.

Best regards,

The Segal Team

Segal Celebrates: Convocation and Honour Roll Night

It was a busy weekend for several members of the Segal team!

On Friday night, our very own Chris Ball was one of the honorees at Chartered Professional Accountants of Ontario (CPA Ontario)’s annual CFE Honour Roll dinner at the Four Seasons Hotel in Toronto. The 2018 Honour Roll is made up of the top 1% of all CFE writers across Canada! Segal Principal, Jason Montgomery, was in attendance at the event and says; “It was a privilege to be there in support of Chris, on behalf of Segal LLP, and to witness him being recognized for his incredible achievement.”

The CFE Convocation was also held this weekend with five members of our team- Chris Ball, Chris Luk, Cheryl Vanderland, Katelyn Li and Victoria Huang- in attendance.

Congratulations to all on your accomplishments!

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Jason and Chris

CFE Convocation

Segal Team Members Take Top Honours

Segal LLP is pleased to congratulate two of our team members on stellar results and achievements.

Our own Cheryl Vanderland is the Recipient of the Alumni Gold Medal for the Lazaridis School of Business & Economics at Wilfrid Laurier University. The gold medal is awarded at convocation in acknowledgment of outstanding academic excellence. Cheryl joined the Segal team last year after completing her co-op terms with us.

Chris Ball, Laurier grad and full-time member of the Segal team, earned a coveted place on the 2018 CFE honour roll. The CFE honour roll recognizes the top one percent of Common Final Examination (CFE) writers across Canada. The CFE is the final examination of the Chartered Professional Accountant (CPA) professional designation in Canada and is the culmination of the rigorous CPA program

To learn more about these talented young professionals, please enjoy these short video interviews:

When and How to Engage a CBV

when & how to engage (1)

 

When and How to Engage a Chartered Business Valuator (“CBV”)

When to involve a CBV

Business owners and legal advisors are often unsure when the services of a CBV are needed and to what extent. Depending on the situation, a CBV could be engaged to act as an independent expert or in an advisory role, where there is no expectation of independence. CBVs are often engaged to work in conjunction with other professionals such as lawyers, accountants and tax specialists.

Examples of situations where a CBV can be involved in are as follows:

Litigation Related Non-Litigation Related
Breach of contract Income tax matters
Loss of profits Estate planning and corporate reorganizations
Business interruption Mergers, acquisitions and divestitures
Personal injury Management buy-outs
Expropriation Financial reporting (IFRS and ASPE)
Shareholder disputes Unanimous shareholder agreements (USA)
Matrimonial disputes Employee share ownership plans (ESOP)


Range of involvement of the CBV

As a trusted expert, the CBV typically provides an expert report containing an independent professional opinion. In doing so, the CBV exercises significant professional judgment and employs his/her experience and independent research. Independent opinion reports prepared on objective basis include the following:

  • Expert Reports related to loss quantification in a litigation context;
  • Limited Critique Reports where one CBV comments on the opinion of another CBV usually in a litigation context; and,
  • Valuation reports (e.g. Calculation, Estimate or Comprehensive level or reporting) defined as follows:
    • Calculation Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on minimal review, analysis and little or no corroboration of relevant information, and is generally set out in a brief Valuation Report
    • Estimate Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on limited review, analysis and corroboration of relevant information, and generally set out in a less detailed Valuation Report
    • Comprehensive Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on a comprehensive review and analysis of the business, its industry and all other relevant factors, adequately corroborated and generally set out in a detailed Valuation Report

CBVs can act in an advisory capacity where there is no requirement for objectivity or independence, such as:

  • Reviewing draft agreements and summarizing financial information;
  • Providing general valuation analytics, observations and recommendations:
  • Providing calculations using directed methodology, techniques, assumptions and inputs:  and,
  • Interpretations only in verbal discussions and schedules summarizing computations which would not qualify as an expert opinion.

How to engage a CBV – the Engagement Letter

The engagement letter identifies the parties to the engagement and by whom the CBV is being retained (e.g. client, legal counsel or jointly). Additionally, it provides a written record of agreed terms that eliminate potential misunderstandings and expectation gaps, sets out fee rates, and outlines conduct of the engagement including the expectations of the client’s cooperation and responsibilities. It also sets out the following:

  • Nature of services and type and level of report being provided;
  • Type and level of report being provided;
  • Valuation Date and period of indemnity (if applicable);
  • What is being valued or quantified and purpose of report;
  • Reference to the applicable Standards of the Canadian Institute of Chartered Business Valuators (“CICBV”);
  • Statement of retention of CBV as Independent or as an Advisor;
  • Any restrictions or limitations in the Engagement;
  • Any specific assumptions we have been asked to make; and,
  • Provide definitions of the terms to be used to arrive at our opinion (for instance, “Fair Market Value” vs. “Fair Value”).

Look for accreditation and experience  

A CBV designation is the accreditation from the CICBV which entails carrying out a comprehensive program of studies and experience requirements. CBVs are nationally and internationally recognized as financial experts in valuing businesses and components of cash flow (e.g., losses, financial and intangible assets). Experience in a particular industry may be an advantage in certain valuations and provides some comfort, but on its own is not a substitute for qualified professional valuation knowledge and broad industry experience.  CBVs are recognized by the courts and the business community as reliable experts.

Finally, it may be tempting to use a valuation report that was prepared at a previous date and/or for another purpose. This may not be appropriate since the different purpose or the passage of time may have rendered to valuation report inappropriate at the current date – valuations can have a short shelf life.  Business owners and legal advisors should be aware of when to engage a CBV to ensure risks related to valuation or litigation are managed appropriately through qualified valuation experts whether it is in an independent expert or in an advisory role.

Irrespective of the purpose for which the CBV is being engaged, involve the CBV as early in the process as possible.

Region Firm Contact
Edmonton Mowbrey Gil Michael Frost, m.frost@mowbreygil.com
Montreal Demers Beaulne Michel Hamelin, mhamelin@demersbeaulne.com
Toronto Segal Nathan Treitel, ntreitel@segaladvisory.com
Vancouver DMCL Danny Loo, dloo@dmcl.ca
Ottawa Marcil Lavallee Keith Chabot, kchabot@mlcpa.ca

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Contributed by Michael Frost, CPA, CA, CVA from Mowbrey Gil.

This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.