Tuesday, June 25, 2013

Exit Planning Doomed to Fail Without Effective Collaboration

Last week, I had the privilege of speaking at the CICBV 2013 Eastern Regional Conference on the issue of business valuation and exit planning in light of the unprecedented transfer of business wealth expected over the coming decade. [1]

Our panel, moderated by Bill Vienneau, Partner at WBLI, Chartered Accountants in Halifax, consisted of Doug Bruce, VP Research at the Canadian Federation of Independent Business (CFIB), Trevor Allibon, Manager Subordinate Financing at the Business Development Bank of Canada (BDC) and myself.

Doug discussed some of the recent CFIB survey results in the area of business succession.  Trevor addressed some of the transition financing options available to business owners.  My focus was on the role of the Chartered Business Valuator (CBV) in educating and assisting business owners through the business transition process.

Some of my main messages to CBVs included: the need to educate business owners on the importance of starting the exit planning process early; how business valuations and value enhancement play an integral role in exit planning; and the importance of CBVs collaborating with other like minded professional advisors to guide business owners through the transition process.

Collaboration among a team of professional advisors is crucial in exit planning since no one professional has the expertise to address in detail all of the issues facing business owners with what may be the biggest transition in a business owner’s life.  Of critical importance for business owners is finding specialists from various disciplines that put the business owner’s interests and goals above all else.

Exit planning is very multi-disciplinary and no one understands this more than a Certified Exit Planning Advisor (CEPA) with the Exit Planning Institute (EPI).  The EPI was formed in 2005 to bring together business brokers, investment bankers, CPAs/accountants, lawyers/attorneys, estate planners, valuation advisors, financial advisors, management consultants and other family business advisors.  Members of the EPI draw upon their combined expertise to better serve the needs of small and mid-sized business owners worldwide.  The common thread uniting these different professionals is their commitment to helping clients exit their companies successfully. [2]

A team of professional advisors can provide real value for the business owner throughout the exit planning process.  According to "RBC Business Succession Planning: Your Essential Road Map", assistance from many of the following professionals will likely be required at some point in the process:
  1. CPA (accountant)
  2. Financial planner / investment advisor
  3. Business valuator
  4. Insurance professional
  5. Lawyer (corporate, tax, estate, M&A)
  6. Family business advisor / facilitator
  7. Commercial banker
  8. M&A professional / business broker
Knowing when to call upon experienced professionals to ensure that the plan is technically sound and will meet the identified goals is critical.  Over the coming weeks, I will outline the role that each of the above noted professional advisors can play in assisting business owners through the exit planning process.

If you have any questions regarding business valuation or the exit planning process in general, contact us at


1.  https://cicbv.ca/events/cicbv-2013-eastern-regional-conference/

Tuesday, June 18, 2013

The Final Step to Reviewing a Business Valuation Report – Consult a CBV

You have now completed your review of a business valuation report by considering:
  1. The type of valuation report;
  2. The author’s credentials and qualifications;
  3. Any scope limitations underlying the conclusions;
  4. The valuation approach(es) adopted;
  5. The reasonableness of the projected cash flows or historical normalization items;
  6. The reasonableness of the discount rate, capitalization rate or valuation multiplier;
  7. Any redundant assets owned by the business;
  8. The income tax implications; and
  9. The overall reasonableness of the value conclusion.
The final step involves consulting an independent Chartered Business Valuator (CBV).  In the context of a legal dispute (e.g. commercial, shareholder or matrimonial dispute) this step is critical.  A survey discussed in CA Magazine showed that 91% of litigators that had retained experts retained them to review opposing expert reports (including business valuation reports). [1]

When served with a business valuation report, litigators (and their clients) will benefit from the above noted process for reviewing that report.  This will enable effective communication with the valuator in order to manage costs for the client.  Consulting a CBV also provides the following benefits:
  1. Receive an independent and objective viewpoint;
  2. Specialized knowledge and experience in business valuation;
  3. Verbal communication of issues and concerns with the opposing expert’s valuation report;
  4. Ascertain the defendant’s potential financial exposure;
  5. Assistance with examinations for discovery of the plaintiff;
  6. Assistance with cross examination of the opposing expert;
  7. The provision of independent expert testimony (e.g. at mediation, arbitration or court) if needed;
  8. Preparation of a Limited Critique Report for use at trial, mediation, arbitration or settlement discussions; and
  9. Preparation of an independent Valuation Report for use at trial, mediation, arbitration or settlement discussions.
According to the Canadian Institute of Chartered Business Valuators (CICBV), a Limited Critique Report is defined as "any written communication containing comments on a report containing a conclusion as to the value of shares, assets or an interest in a business, or any conclusion of a financial nature in the context of litigation or a dispute, that does not itself contain a valuation conclusion or any conclusion of a financial nature." [2]

A Limited Critique Report can be very helpful for identifying issues or concerns with the plaintiff’s business valuation, which can help facilitate settlement discussions.  However, if an independent business valuation is required, the CBV will have to provide a Valuation Report, which as discussed under an earlier post, can take the form of a Calculation, Estimate or Comprehensive Valuation Report.

If you are acting for the defendant in a legal dispute involving a business valuation and have just been provided with the plaintiff’s expert business valuation report, contact us at www.vspltd.ca.  We can help by providing some preliminary comments, a Limited Critique Report, a Valuation Report or any of the other benefits outlined above. 

2.  CICBV Professional Standards No. 410, 420 and 430 - Limited Critique Reports.

Tuesday, June 11, 2013

Start Building Your Seller’s Pre-Sale Diligence Binder Today

I recently had the privilege of hearing Garth Stephanson speak at the May 2013 Estate Planning Council of Toronto dinner.  Garth’s story was fascinating and he provided extremely valuable advice for business owners when it comes to building a business for a successful transition.  His advice is especially critical given the implications for business owners of the unprecedented transfer of business wealth expected over the coming decade.
After 32 years as CEO, Garth sold his manufacturing business in 2004 when sales had grown to approximately $15 million.  The planning, however, began 3 years earlier.  According to Garth:
"There was no doubt that this would be the largest one-time transaction of my life.  Having never sold a company, I didn’t know how to start the process, so I began doing preparation work.  It paid off big time." [1]
Garth began the process by preparing a seller’s pre-diligence package which he referred to as his "black book" binder.  This binder contained answers to questions that advisors and potential buyers would likely ask and Garth knew that it had to be logical, informative, current and accurate.
According to Garth, "More than one professional was considered for each position on the exit team and different tabs were requested by members for varying reasons."  Members of the exit team included a Chartered Accountant (CA), Chartered Business Valuator (CBV), investment banker, lawyer, insurance professional, estate planner and personal financial planner.
The key for Garth was starting the process early.  This allowed him to proceed at his pace and did not interfere with the day to day management of his business.
Every business owner’s "black book" will be different and unique to the business.  Some of the tabs included in Garth’s binder included:
  1. Brief history and overview of company, including corporate organization chart 
  2. Audited financial statements for past 2 years  
  3. Corporate tax returns and assessment
  4. Details regarding the top 5-10 customers
  5. Anticipated changes in existing customers’ future purchases
  6. Top 10 potential new customers (targets) over coming 2 years
  7. Strategic plan, including financial projections
  8. Key senior executives and reasons why each would remain with the company after a sale
  9. Capital asset summary, including condition and estimated market value
  10. Details regarding IT/computer system
  11. Independent business valuation and real estate appraisal
  12. Normalized EBITDA calculations
  13. Summary of legal actions in past 5 years
  14. Company handbook and employee profit sharing plan
  15. Copy of non-compete agreements and employee benefit plans

Garth admits that it was a lot of work preparing his binder but completing it slowly over several months decreased the anxiety and provided a significant payoff.
"Between the reduction of legal and accounting fees because required data was readily available, and providing leverage to our skilled negotiator, I estimate a 10% premium" Garth states.   "Of far greater importance was the acceptance of our file by some very skilled and competent advisors.  Several admitted that they had previously refused clients who were improperly prepared or were selling from a position of weakness.  Attracting excellent professional advisors was imperative in obtaining a significant premium sale price."
Starting early allows you to spread the time and investment over a number of years and the benefits will be significant: a smoother transition process; maximize price; and reduced transaction costs.

If you have any questions regarding the exit planning process or if you would like assistance with building your pre-sale diligence package, contact us at www.vspltd.ca.

1.  Article by Garth Stephanson entitled "Before Selling Your Business, Build a Black Book" published in Plastics Today September 2008.

Wednesday, June 05, 2013

Step 9 to Reviewing a Business Valuation Report – Reasonableness Testing

Does the valuation report provide sufficient reasoning and rationale to support its findings?  This is a key question to ask when reviewing a business valuation report given that business valuations are somewhat subjective in nature.

Step 9 to reviewing a business valuation report involves assessing the reasonableness of the value conclusions, including the implied intangible value, and/or identifying what reasonableness testing the valuator used to support his/her findings.  Here are 6 reasonableness tests to consider when reviewing a valuation report:

1.  Nature of intangible value

The value of a business can be segregated into 2 components: net tangible asset value (including redundant assets and net of debt); and intangible asset value.  To assess the reasonableness of the value conclusion, you must determine the implied intangible asset value and consider whether this value is justified in light of the specific factors regarding the company’s history and operations.

Factors to consider can include: a recurring revenue stream; customer contracts and/or long-standing relationships; a competitive advantage; a recognized brand name; an established workforce; an effective sales team; an experienced and effective management team; past and future growth; proprietary software or technology; copyrights, trademarks, patents, etc.

2.  Alternate valuation approach

A business valuator will typically select a primary valuation approach to value a company. You should consider whether it is reasonable to consider a secondary valuation approach and, if so, what the value would be under this secondary approach.

Does the secondary valuation approach corroborate the findings under the primary valuation approach?  Examples might include: using the market approach as a secondary approach to an income approach; using the Capitalized Cash Flow ("CCF") approach as a secondary approach to a Discounted Cash flow ("DCF") approach; and using the Capitalized Earnings ("CE") approach as a secondary approach to a CCF approach.

3.  Implied valuation metrics

Certain implied valuation metrics should be calculated when reviewing a business valuation report.  Some common ones to determine include: payback period (i.e. number of years to recover intangible value), EBITDA multiples, Seller’s Discretionary Earnings ("SDE") multiples, sales multiples and intangible value as % of enterprise value ("EV").

Do these valuation metrics make sense given the company’s operations, specific risk factors and when compared to implied multiples from comparable public companies, industry transactions and rules of thumb?

4.  Public company valuation multiples

The implied valuation multiples from comparable public companies can be compared to the implied valuation multiples of the target business (i.e. calculated under #3 above).

Although there are issues with relying on public company valuation multiples to value a privately held company (e.g. due to differences in operations, size, liquidity, growth, etc.), if properly selected and adjusted, they can be useful as an effective reasonableness test.

5. Industry transactions

The implied valuation multiples from actual industry transactions can be compared to the implied valuation multiples calculated under #3 above.

Although there are issues with relying on valuation multiples from actual industry transactions to value a target company (e.g. lack of information, negotiating strengths, emotions, form of consideration, etc.), if sufficient information is available and multiples are appropriately adjusted, they can be useful as an effective reasonableness test.

6.  Industry rules of thumb

Industry rules of thumb can be compared to the implied valuation multiples calculated under #3 above.  Although rules of thumb should never be used in isolation or as a primary valuation approach, they can be useful as an effective reasonableness test.

Assessing the reasonableness of the value conclusions is critical to an effective review of a business valuation report.  Depending upon the scope of review, depth of inquiries and experience level, this is an area where business valuators can differ significantly.

If you have any questions with respect to valuation reasonableness testing or if you would like an independent business valuator to assist in your review of a business valuation report, contact us at www.vspltd.ca