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Business Valuations In The Long-Term Care Homes Sector
Sep 3,2019
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By Segal LLP
Nathan Treitel, Partner at Segal Valuation and Transaction Advisory, co-authored this article for the Chartered Business Valuator Institute’s Journal of Business Valuation.
The expected growth in the seniors’ age demographic in the coming decades has garnered considerable attention in the social, political and financial discourse of late. This has brought attention to expense and capacity issues around seniors’ residential care. In addition to the costs of administering care, residential facilities involve substantial capital costs in the form of land, buildings and equipment. Further, while provincial governments have historically provided funding to the sector, we are likely to see significant policy changes in the coming years, particularly in jurisdictions facing intense budgetary pressures. These dynamics are common to most jurisdictions within Canada.
Within the seniors housing and residential care industry, market participants typically segment properties as retirement homes (RHs) or long-term care homes (LTCHs). While the two segments are related, the businesses are different enough to warrant the distinction, particularly as it relates to the level of care delivered within the residence, the extent of government operating funding and regulatory involvement in the business operations. Residents of LTCHs most often have more significant care requirements and benefit from government subsidies to cover the personal care services delivered within the property, whereas the cost of RH services and accommodation is most often exclusively the responsibility of the resident.
The valuation of firms that own and operate LTCHs must take into consideration numerous market and government policy factors. Critical market factors include demographics, cost of capital, resident choice, competition, economies of scale, availability of staffing, and the impact of negative media coverage. The principal policy factors can be divided, practically, into those affecting government funding, and those related to governance, which include licensing, regulation of services, inspection and compliance.
To learn more about business valuations in the long-term care home sector, click here to download the full report.
The expected growth in the seniors’ age demographic in the coming decades has garnered considerable attention in the social, political and financial discourse of late. This has brought attention to expense and capacity issues around seniors’ residential care. In addition to the costs of administering care, residential facilities involve substantial capital costs in the form of land, buildings and equipment. Further, while provincial governments have historically provided funding to the sector, we are likely to see significant policy changes in the coming years, particularly in jurisdictions facing intense budgetary pressures. These dynamics are common to most jurisdictions within Canada.
Within the seniors housing and residential care industry, market participants typically segment properties as retirement homes (RHs) or long-term care homes (LTCHs). While the two segments are related, the businesses are different enough to warrant the distinction, particularly as it relates to the level of care delivered within the residence, the extent of government operating funding and regulatory involvement in the business operations. Residents of LTCHs most often have more significant care requirements and benefit from government subsidies to cover the personal care services delivered within the property, whereas the cost of RH services and accommodation is most often exclusively the responsibility of the resident.
The valuation of firms that own and operate LTCHs must take into consideration numerous market and government policy factors. Critical market factors include demographics, cost of capital, resident choice, competition, economies of scale, availability of staffing, and the impact of negative media coverage. The principal policy factors can be divided, practically, into those affecting government funding, and those related to governance, which include licensing, regulation of services, inspection and compliance.
To learn more about business valuations in the long-term care home sector, click here to download the full report.
Liquidity Alternatives
In my previous article, I discussed how to prepare a business for a liquidity event. Proper preparation ensures a business is well-positioned when encountering any unexpected events that may result in a liquidity event. It is recommended to give consideration to various liquidity alternatives in order to yield results that are optimal to shareholders and allow them to best meet their objectives.
Shareholder Motivations for Liquidity
Liquidity Alternatives
Numerous liquidity alternatives exist that allow individual shareholders to realize their objectives. These alternatives include:
Characteristics of Liquidity Alternatives
The transaction alternatives, as noted above, each have certain characteristics which make it a better option for achieving the shareholder motivations and objectives. Some of these characteristics include:
We oftentimes find shareholders desiring a liquidity event fixated on a particular transaction alternative. Given the range of transaction alternatives available, it behooves business owners to carefully consider all the options so that they can identify the alternative objectives available to them.
This is the second article in a series by Nathan Treitel, MBA, CBV, from Segal LLP’s Valuation and Transaction Advisory.
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.
Shareholder Motivations for Liquidity
- Business owners may desire to “take some money off the table” and reduce personal financial risk by diversifying their assets.
- Business owners may be looking to take a step back from the business in order to pursue other interests or retire.
- A shareholder can elect to leave the business due to challenging interpersonal situations resulting from mutual ownership with other individuals with different personalities and/or visions for the future growth of the business.
- An unexpected personal circumstance, such a death, deteriorating health or divorce, may require the division of family assets.
Liquidity Alternatives
Numerous liquidity alternatives exist that allow individual shareholders to realize their objectives. These alternatives include:
- Management /Employee-Led Buyouts: a company is sold to its existing management or employees
- Recapitalizations and Financial Restructurings: new capital is infused into a company to facilitate growth and the partial buyout of existing shareholders
- Divestitures: selling a company to a strategic or financial investment that is external to the business
- Raising Private Capital: raising debt and/or equity capital to facilitate growth or ease liquidity constraints
Characteristics of Liquidity Alternatives
The transaction alternatives, as noted above, each have certain characteristics which make it a better option for achieving the shareholder motivations and objectives. Some of these characteristics include:
- Confidentiality: the ability to maintain a higher degree of confidentiality about the existence of the process and the fact that existing shareholders are looking for a buyer or investor
- Speed: certain of the alternatives have the advantage of being able to be executed more rapidly due to the familiarity of the buyer/investor with the business and the fact that the required capital for the transaction is readily available.
- Growth & Upside: certain of the alternatives allow existing shareholders to continue to retain an interest in the company where they believe considerable future growth and upside potential exists. These alternatives involve partnering with experienced investors with access to tangible resources, experience and knowledge not available to the existing management and shareholders.
- Price: by their nature, some of the alternatives will be directed to a broader pool of potential buyers/investors and a more formal auction process will likely be undertaken. Broad auction processes that target strategic investors are typically considered optimal from a price perspective.
- Use of Proceeds: certain of the alternatives, by design will result in existing ownership being diluted, taking chips off the table and diversifying their assets. Other alternatives do not necessarily (immediately) allow for these options.
- Ongoing ownership and management: certain of the alternatives result in existing ownership severing the relationship with the company immediately while others result I n continued ownership and possibly management roles going forward. One also needs to contemplate the various alternatives in light of the shareholder’s com with having additional/new stakeholders at the table.
We oftentimes find shareholders desiring a liquidity event fixated on a particular transaction alternative. Given the range of transaction alternatives available, it behooves business owners to carefully consider all the options so that they can identify the alternative objectives available to them.
This is the second article in a series by Nathan Treitel, MBA, CBV, from Segal LLP’s Valuation and Transaction Advisory.
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.
New CRA Audit Project: Car Expenses
It appears that the Canadian Revenue Agency (CRA) has a new project: corporate car expenses. This change comes as a surprise as previous correspondence from CRA was proposing to disallow personal car expenses for owner-managers.
In CRA correspondence that we have seen of late, the focus is on those companies that had an expense in the vehicle expense line of the tax return. The standard letter is asking for the following items:
They appear to be dealing with the years 2016 and 2017, which will shortly be statute barred.
One of the main issues being dealt with by accountants is that many clients do not keep very good travel logs. Additionally, there are a number of clients who purchased cars in the owner’s name and not the corporation’s name, even though the corporation is deducting the expenses. Another issue is that the only backup for expenses is credit card statements and not the actual invoices or receipts. This could be a problem, as CRA has stated that they will not accept credit card statements because the statements do not provide sufficient detail. To date, we have not received correspondence from CRA that they will not accept the credit card statements, but we have reason to believe that this will be the case.
In general, there are a set of rules depending on whether an individual or corporation owns the car. Where the company owns the car, there may be requirements for calculations on both the operating benefit and the standby charge. The operating benefit is a per kilometer benefit for every personal-use kilometer used ($0.28 per km). This amount should be included in the income of the individual who uses the corporate car. There is also the concept of a standby charge. If the car is corporate-owned, it is 2% of the original cost of the vehicle. If the car is corporate leased, it is 2/3 of the monthly lease cost. Both of these numbers are then multiplied by the number of months that the vehicle is available during the year. There is, however, a reduction of the standby charge where the car is used more than 50% business use and less than 20,000 km of personal use. In those cases, the standby charge is prorated based on personal use versus the total use.
The challenge that many clients and taxpayers have is poor record keeping. One of the things to consider, in order to reduce the level of record-keeping, is for the corporation to pay a “reasonable allowance”. Based on CRA rules, a reasonable allowance is a per kilometer allowance of $0.58 for the first 5,000 kilometers and $0.52 for each kilometer thereafter. The record-keeping required is to submit the number of business kilometers driven each month. In this way, receipts and other backup are not required for the actual operating expenses.
When a reasonable allowance is paid, it does not show up on an individual’s T4 and the individual does not need to report it. The corporation deducts this expense as a car expense.
The key takeaway is to ensure that clients and taxpayers keep sufficient records to justify their business car expenses.
Contributed by Howard Wasserman CPA, CA, CFP, TEP, a Tax Partner at Segal LLP.
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.
In CRA correspondence that we have seen of late, the focus is on those companies that had an expense in the vehicle expense line of the tax return. The standard letter is asking for the following items:
- A detailed list of the general ledger transactions for vehicle expenses.
- Invoices of the ten largest items in one month in the year.
- A listing of the vehicles with clarification as to who owns the vehicles.
- The make and model of the vehicles that the company leased.
- The percentage allocation between personal use and business use as well as a copy of the log used to track the business and personal use.
- An explanation of how the business and personal use is dealt with. For example, they are asking if expenses were reduced or reimbursed or if there is an employee benefit or standby charge.
They appear to be dealing with the years 2016 and 2017, which will shortly be statute barred.
One of the main issues being dealt with by accountants is that many clients do not keep very good travel logs. Additionally, there are a number of clients who purchased cars in the owner’s name and not the corporation’s name, even though the corporation is deducting the expenses. Another issue is that the only backup for expenses is credit card statements and not the actual invoices or receipts. This could be a problem, as CRA has stated that they will not accept credit card statements because the statements do not provide sufficient detail. To date, we have not received correspondence from CRA that they will not accept the credit card statements, but we have reason to believe that this will be the case.
General Car Rules
In general, there are a set of rules depending on whether an individual or corporation owns the car. Where the company owns the car, there may be requirements for calculations on both the operating benefit and the standby charge. The operating benefit is a per kilometer benefit for every personal-use kilometer used ($0.28 per km). This amount should be included in the income of the individual who uses the corporate car. There is also the concept of a standby charge. If the car is corporate-owned, it is 2% of the original cost of the vehicle. If the car is corporate leased, it is 2/3 of the monthly lease cost. Both of these numbers are then multiplied by the number of months that the vehicle is available during the year. There is, however, a reduction of the standby charge where the car is used more than 50% business use and less than 20,000 km of personal use. In those cases, the standby charge is prorated based on personal use versus the total use.
The challenge that many clients and taxpayers have is poor record keeping. One of the things to consider, in order to reduce the level of record-keeping, is for the corporation to pay a “reasonable allowance”. Based on CRA rules, a reasonable allowance is a per kilometer allowance of $0.58 for the first 5,000 kilometers and $0.52 for each kilometer thereafter. The record-keeping required is to submit the number of business kilometers driven each month. In this way, receipts and other backup are not required for the actual operating expenses.
When a reasonable allowance is paid, it does not show up on an individual’s T4 and the individual does not need to report it. The corporation deducts this expense as a car expense.
The key takeaway is to ensure that clients and taxpayers keep sufficient records to justify their business car expenses.
Contributed by Howard Wasserman CPA, CA, CFP, TEP, a Tax Partner at Segal LLP.
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.
Pre-Employee Share Ownership Plans (“ESOP”)
Developing an ESOP is new territory for both employer and employee. Many owners may already have a clear plan mapped out and have shared this plan with their employees, whilst others are less advanced in the ESOP process.
It is important for the business valuator engaged in the ESOP process to determine which end of the spectrum their client is on as this will have a bearing on the terms of the valuation engagement and the assistance required.
Irrespective of where your client is on their ESOP journey, the following key principles should be followed throughout all stages of the valuation process:
Engaging the Business Valuator – the “When and “Why”
When should you engage a Business Valuator? – It is never too early…
Early Planning Considerations from the Owner’s Perspective:
Employer Financing or Corporate Guarantees to employees: Why should you engage an Independent Business Valuator? It is extremely important to get the initial valuation RIGHT as:
Valuation Engagement Process
Who is engaging and paying the Business Valuator? Irrespective of whom, the concept of independence must be clearly communicated.
What Level of Report is required? A higher level of assurance may be more important to the employee than the employer. Two most common types of Report:
Other Valuation Considerations:
In conclusion, the valuation process will ultimately be driven by the circumstances in each specific situation, and the likelihood of a smoother process and positive outcome increases the earlier in the process the Business Valuator is engaged.
Contributed by Andrew Dey 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.
It is important for the business valuator engaged in the ESOP process to determine which end of the spectrum their client is on as this will have a bearing on the terms of the valuation engagement and the assistance required.
Irrespective of where your client is on their ESOP journey, the following key principles should be followed throughout all stages of the valuation process:
- Transparency – through an independent valuation;
- Communication – through regular updates to employees on the valuation process;
- Setting and Managing Expectations – communicating any changes to % ownership offered, price, terms, etc. in real-time.
Engaging the Business Valuator – the “When and “Why”
When should you engage a Business Valuator? – It is never too early…
Early Planning Considerations from the Owner’s Perspective:
- Purification of Company (for tax purposes) if the owner is selling their shares;
- Is a share freeze required if the value of shares may be too high (expensive) for an employee to buy-in;
- Corporate Reorganization – removal of non-operating assets from the company;
- Adequacy of share structure – what if issued share capital is only 1 share?
- Early indication of value may help determine how an employee is buying shares:
- Purchase from Owner – can the employee afford the shares?
- Purchase from Treasury – is there a need for a share freeze prior to buy-in?
- Potentially an early reality check on Value from the owner’s perspective.
Early Planning Considerations from the Employee’s Perspective:
The sooner in the process Value is established, the sooner the employee can determine:
- Can they afford to buy in; and,
- Do they want to buy in.
- Purchase for Cash – employee savings, RSP’s, TFSA’s
- Purchase in lieu of bonuses;
- Purchase through payroll deductions;
Employer Financing or Corporate Guarantees to employees: Why should you engage an Independent Business Valuator? It is extremely important to get the initial valuation RIGHT as:
- It establishes the initial buy-in price for the employees;
- It sets the benchmark for measuring future growth and increase in share value.
- Eliminates owner bias as to Value;
- Provides transparency to employees – it is not the owner’s number!
- The Business Valuator is available to provide independent information and analysis to both employer and employee without professional conflict.
- Lends credibility to the determination of Value – important to employees as potential investors and to third party lenders.
Valuation Engagement Process
Who is engaging and paying the Business Valuator? Irrespective of whom, the concept of independence must be clearly communicated.
What Level of Report is required? A higher level of assurance may be more important to the employee than the employer. Two most common types of Report:
- Calculation of Value – basically uses the owner’s numbers with little or no corroboration;
- An estimate of Value – an independent assessment of business and economy – a higher level of corroboration.
Other Valuation Considerations:
- Valuation Date – should be current;
- What is being valued – 100% of shares (en bloc) of specific percentage;
- Basis of Valuation – Fair Market Value, Fair Value, Net Book Value?
In conclusion, the valuation process will ultimately be driven by the circumstances in each specific situation, and the likelihood of a smoother process and positive outcome increases the earlier in the process the Business Valuator is engaged.
Contributed by Andrew Dey 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.
Revenue Diversification by Non-Profit Organizations
The Canadian Income Tax Act defines a non-profit organization as “a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit….”
On several occasions over recent years, the Canada Revenue Agency has had to issue interpretations on this subsection in order to offer its opinion on whether activities carried out by non-profit organizations, such as the rental of parking spaces, income generated through fibre-optic networks or other similar activities, could have an impact on the tax status of such organizations. In any case, the CRA has deferred to the courts in each of its interpretative notes, in holding that the profit must be ancillary and in support of the organization’s objectives.
Possible Changes to the Income Tax Act
During the presentation of the 2014 Federal Budget, the Minister of Finance made known his intention to reexamine the tax-exempt status of non-profit organizations. The review would be to determine whether such an exemption continued to be properly targeted and whether sufficient transparency and accountability provisions were in place. At the moment, it is still unclear if the liberal government, elected in 2015, will hold this review. In November 2016, the Minister of Finance stated that such a consultation remained possible but was not a priority at the time.
Case-law
The courts have clarified that a non-profit organization can diversify its income sources while still maintaining its tax-exempt status under the Income Tax Act. However, the courts have stated that, to avoid a change in tax status, the activities of the organization must be linked to its mission as well as be ancillary to it.
For some years now, the Canada Revenue Agency has taken the same stance as the courts. However, the CRA often takes a far more restrictive interpretation of what can be considered an ancillary activity with a link to the mission of the organization.
Conclusion In our opinion, non-profit organizations should exercise a certain amount of caution before diversifying their activities. It would seem astute to first show that the new activities have a connection with their mission and that they are ancillary to those main activities. This would help ensure that your status as a non-profit organization will not be later disputed by the Canada Revenue Agency.
Contributed by Marcil Lavallée. 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.
On several occasions over recent years, the Canada Revenue Agency has had to issue interpretations on this subsection in order to offer its opinion on whether activities carried out by non-profit organizations, such as the rental of parking spaces, income generated through fibre-optic networks or other similar activities, could have an impact on the tax status of such organizations. In any case, the CRA has deferred to the courts in each of its interpretative notes, in holding that the profit must be ancillary and in support of the organization’s objectives.
Possible Changes to the Income Tax Act
During the presentation of the 2014 Federal Budget, the Minister of Finance made known his intention to reexamine the tax-exempt status of non-profit organizations. The review would be to determine whether such an exemption continued to be properly targeted and whether sufficient transparency and accountability provisions were in place. At the moment, it is still unclear if the liberal government, elected in 2015, will hold this review. In November 2016, the Minister of Finance stated that such a consultation remained possible but was not a priority at the time.
Case-law
The courts have clarified that a non-profit organization can diversify its income sources while still maintaining its tax-exempt status under the Income Tax Act. However, the courts have stated that, to avoid a change in tax status, the activities of the organization must be linked to its mission as well as be ancillary to it.
For some years now, the Canada Revenue Agency has taken the same stance as the courts. However, the CRA often takes a far more restrictive interpretation of what can be considered an ancillary activity with a link to the mission of the organization.
Conclusion In our opinion, non-profit organizations should exercise a certain amount of caution before diversifying their activities. It would seem astute to first show that the new activities have a connection with their mission and that they are ancillary to those main activities. This would help ensure that your status as a non-profit organization will not be later disputed by the Canada Revenue Agency.
Contributed by Marcil Lavallée. 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.
