Sunday, January 27, 2013

Highlights from the Latest CFIB Research on Succession Planning

"The value of business succession planning cannot be underestimated given that about one trillion dollars of business assets could be transferred to the next generation in the next decade." [1]
In November 2012, the CFIB released the results of a study on business succession planning that was conducted over the period from March 9 to May 4, 2011.  Over 8,300 Canadian business owners responded to the study. Some of the highlights are as follows:
  1. Business succession planning is a long-term process and not a one-time event requiring high investment on behalf of the business owner.
  2. 51% of business owners do not have a business succession plan (formal or informal).
  3. 51% of business owners started their business from scratch (as opposed to acquiring the business). As a result, many may not see the value of succession planning since they did not take part in the past.
  4. Close to 50% of business owners plan on exiting their business in the next five years with more than 75% planning to exit within the next 10 years.
  5. Nearly 50% of business owners plan on selling the business to a third party with over 33% planning to sell or transfer the business to a family member.
  6. The top 4 barriers to completing a business succession plan include:
  7. a)  Finding a buyer/suitable successor;
    b)  Valuing the business;
    c)  Financing for the successor; and
    d)  The business being too heavily dependent on the owner's active involvement.
  8. The top 4 reasons for not having a business succession plan include:
  9. a)  Too early to plan;
    b)  No time to deal with the issue;
    c)  Can't find adequate advice/tools to start; and
    d)  It is too complex.
Being able to measure the value of the business is a critical aspect of the business succession plan.  Any disconnect between the expected value of the business and the actual valuation will make exiting the business extremely difficult.

In conclusion, the CFIB advises that a well designed succession plan will help ensure the future stability and value of the business and ultimately a smooth transition for the business and business owner.
For those business owners that recognize the importance of beginning the exit planning process early, especially in light of the expected increase in the supply of businesses that will be for sale over the coming decade, but have no time to deal with the issue, can't find adequate advice and think it is too complex, let the trained professionals at VSP assist you through the process (
1.  Canadian Federation of Independent Businesses (CFIB) Research – Survey Results on Small Business Succession Planning, November 2012.

Wednesday, January 23, 2013

Could You Sell Your Business As Is?

Have you ever wondered if you could sell your business as is?  You may think you have an attractive and valuable company but, would a potential purchaser agree?  Are you ascribing value to sweat equity that a potential purchaser may not attribute value to?  Are you even aware of what a potential purchaser would be willing to pay for your business today?  To answer these questions, you must start thinking like a potential purchaser.
Knowledge is power and arming yourself with the knowledge of how potential purchasers view your business and what they would be willing to pay for your business is very powerful.  The Sellability Score questionnaire is a useful planning tool to help business owners think more like a potential purchaser.

The Sellability Score is an online tool developed by John Warrillow, author of "Built to Sell: How to Create A Business That Can Thrive Without You".  This innovative software helps business owners determine how easy it would be to sell the business as is and predicts the likelihood of receiving a premium over industry average multiples if the business were packaged for sale today.
The Sellability Score is a free and completely confidential self-assessment tool that scores your business in a number of key areas and provides information to help determine:
  • Whether your business is easy or hard to sell;
  • How to improve the sellability of your business; and
  • The questions you need to be asking before you sell your business. 
Business owners simply complete a brief online questionnaire to receive an immediate Sellability Score of between 1 and 100 for the business.  A detailed report is produced that provides insights into how buyers evaluate the business.  The report contains more detailed information on the eight key attributes of a sellable business and why these factors are so important.  It will help you pin point the areas in your business that need improvement in order to maximize the value of your company.  The 8 key attributes (which will be discussed in more detail in future entries) include:
  1. Financial performance
  2. Growth potential
  3. Switzerland structure
  4. Valuation teeter totter
  5. Hierarchy of recurring revenue
  6. Monopoly control
  7. Customer satisfaction
  8. Hub and spoke
The Sellability Score is the easiest way for business owners to begin the pre-sale planning process by identifying the company’s strengths and weaknesses (in terms of its sellability).  This questionnaire should be taken at least 3 years in advance of a sale or transition to allow time to implement value enhancement initiatives and other vital pre-sale planning activities.
You may not be looking to sell your business today.  However, an estimated $1.9 trillion in business assets (or 310,000 businesses) are poised to change hands over the coming 5 years.  The increasing supply of businesses for sale will create a buyer’s market putting downward pressure on sale prices over this time period.  The Sellability Score can provide you with vital information needed to command a premium price when it comes time to sell your business in a competitive buyer’s market.
To find out your company’s Sellability Score:


Tuesday, January 15, 2013

Critiquing an Expert Report: Step 7 - Discounting Future Damages

Step 7 to critiquing an expert report on damages in a commercial dispute involves identifying the extent to which the damages period extends beyond the current date (or anticipated trial date) and assessing whether or not the expert reasonably present valued the future damages (e.g. lost profits) to the breach date or the trial date at an appropriate discount rate.
The discount rate used to present value future losses in a commercial dispute is often one of the major assumptions underlying a damages calculation which, if altered, can have a significant impact on the conclusions.
As you review the expert report, the following questions should be addressed:
  1. Does the damages period extend into the future (beyond the trial date)?
  2. Have the future damages been present valued to the trial date or the breach date?
  3. What discount rate was used to present value the future damages and does it accurately reflect the risks underlying the projections?
According to The Litigator’s Guide to Expert Witnesses:
"Where a stream of future income is being analyzed to determine damages, an appropriate discount rate has to be determined.  The discount rate, when applied to monetary sums receivable in the future, expresses these sums at their current worth, taking into account the time value of money and the future risk that these future sums may not be received."
 "In several provinces, there is a prescribed discount rate. However, in cases of commercial litigation, careful consideration must be given to the appropriateness of this prescribed discount rate which always carries with it two assumptions:
    • All revenues and costs will increase in line with the rate of inflation; and
    • The long-term rate of return is equivalent to that available on Government of Canada bonds.
If one or both of these assumptions are inappropriate in a commercial situation, then a different discount rate will have to be calculated." [1]

Prescribed rates reflect risk-free rates and are commonly used in personal injury matters.  They are generally not appropriate in commercial disputes as cash flows associated with a business are not risk-free (i.e. the long-term rate of return for businesses is generally not equivalent to the rate of return on Government of Canada bonds).  In other words, where an expert has present valued future losses in a commercial dispute you should expect the discount rate applied to be higher than the prescribed rates.  

This is an important point because applying a higher discount rate to future losses will result in a lower value being attributed to the breach.  Conversely, a lower discount rate will increase the value attributed to the breach.  As a result, the application of prescribed or risk-free rates in a business loss matter is a red flag that the expert’s damages conclusion may be overstated. 
Where the expert’s discount rate assumption is not reasonable under the circumstances, you should consider the impact of using a more appropriate discount rate assumption on the conclusions.  The assistance of an independent expert CBV may be required in this regard. Determining an appropriate discount rate requires a comprehensive assessment as to the business, financial and economic risks facing the business along with research regarding industry transactions and/or public company trading multiples as well as experience and judgment on the part of an expert trained in this area.
The discount rate used to present value future damages is often a major assumption underlying a damages calculation.  Taking the time to understand what the expert assumed in this regard and assess its reasonableness in light of the facts and circumstances of the case is critical to conducting an effective review of that expert’s report.
1.  The Litigator's Guide to Expert Witnesses, Mark J. Freiman and Mark L. Berenblut, 1997, pages 91 - 92.