How to Minimize Costs in a Matrimonial Separation

A sobering statistic for many is that over 40% of marriages will end in divorce before the 50th year of marriage. [1]  This does not exclude business owners and a matrimonial separation can result in significant professional fees for business owners, especially when the value of the business is a key area of dispute.  An independent business valuation can help to minimize legal and expert fees for business owners going through a matrimonial separation.

 

The division of property is a major issue in a matrimonial separation.  According to the Ontario Ministry of the Attorney General [2]:

"When a marriage ends, … the value of any property that was acquired by a spouse during the marriage and still exists at separation must be divided equally between the spouses.  Also, any increase in the value of property owned by a spouse at the date of marriage must be shared.  The payment that may be owed to one of the spouses in order to effect this sharing is called an equalization payment, or an equalization of net family property."

Upon separation a net family property (NFP) statement is prepared setting out the value of the assets and liabilities of each spouse as at the date of marriage and the separation date.  Privately held business interests (i.e. shares, stock options, restricted stock, etc.) constitute property, the value of which must be included in the NFP statement.  The assistance of a Chartered Business Valuator will likely be needed where there are business interests and the parties cannot mutually agree on the value of the those interests as at the marriage date or the separation date. 

 

Depending on the separation process (i.e. collaborative, mediation, litigation, etc.), the parties may agree to jointly retain one independent business valuator to value the business interests.  One party, however, may opt to individually retain an independent business valuator.  The other party will often then retain a separate independent business valuator to review, critique and respond to the other expert’s report.  This can be a costly process. 

 

Where spouses disagree over the value of the business significant legal and expert business valuation fees can be incurred towards various activities relating to the value of the business interests (e.g. document productions, discoveries, legal motions, expert reports, negotiations, critique reports, trial, etc.).  This can become a very costly, time consuming, and emotionally draining process. If the business valuation issue becomes very contentious, professional fees can quickly escalate to well over $100,000. 

 

Obtaining an independent business valuation for a fraction of this cost can help avoid a disagreement over value in the event of a marital breakdown, which is well worth it if it saves hundreds of thousands of dollars in professional fees.  By not having an independent business valuation (and discussing this issue with your spouse) you increase the chances of there being a dispute over the value of the business in the event of a matrimonial separation.

 

Contact us at jason@vspltd.ca or www.vspltd.ca to find out more about the business valuation process and the types of valuation reports that CBVs provide.

 

 

1.  Source: www.statcan.gc.ca, CANSIM Table 101-6511.

2.  Source: www.attorneygeneral.jus.gov.on.ca.

Avoiding Costly Shareholder Disputes

Business ownership can be complicated, particularly when there are multiple shareholders.  The odds of disagreement and conflict among shareholders over various issues can be very high.  When shareholder relationships break down there must be a mechanism in place for dealing with the dispute or for enabling one or more of the shareholders to exit the business in a pre-determined manner. 

 

A shareholder buyout can quickly turn into a costly dispute if the value of the business has never been discussed and agreed to among the shareholders.  Different shareholders likely have different expectations regarding the value of the business.  Having an effective Shareholder Agreement and obtaining an independent business valuation can help avoid a very costly, time consuming and emotionally draining shareholder dispute.

 

I have been retained in many shareholder disputes to provide an independent expert business valuation for purposes of determining a price at which the departing shareholder’s shares should be acquired by the remaining shareholder(s) or redeemed by the company.

 

In my experience, these disputes can be devastating to the business as well as the individuals involved.  The shareholders become distracted and ultimately exhausted from preparing for and attending discoveries, meetings with lawyers and experts, settlement negotiations and arbitration or court proceedings.  Relationships are destroyed and ultimately the business suffers because the shareholders are no longer devoting sufficient time and attention to managing the company’s operations.

 

The importance of a Shareholder Agreement to privately held business owners cannot be over emphasized.  An effective Shareholder Agreement should address the following areas: i) compensation; ii) decision making; iii) entrance; iv) exit; and v) return on investment.  Privately held company shares are illiquid assets and the Shareholder Agreement should provide the shareholders with the means to liquidate an otherwise illiquid asset under certain triggering events.  For example, a buy-sell provision (or "shotgun" clause) allows for one shareholder to offer to buy the shares of another shareholder subject to the right of the other shareholder either: i) accepting that offer; or ii) buying the shares of the offering shareholder at the same price offered by that shareholder.

 

With respect to the valuation of the business and the individual shareholdings, the Shareholders Agreement should provide a definition of value (e.g. fair market value or fair value) and set out the process and timing for obtaining an independent valuation.  Many Shareholder Agreements stipulate that an annual or biennial valuation of the business should be prepared by an independent Chartered Business Valuator (CBV).  This independent valuation forms the basis for new shareholders to buy-in and for existing shareholders to exit or measure their return on investment. 

 

Committing to a formal business valuation allows the shareholders to discuss and agree to the value of the business before any potential disagreements arise.  In the event of a shareholder buyout, the valuation issue will have already been addressed.  The return on investment to the shareholders will be substantial if it means avoiding a costly, time-consuming, emotionally draining and perhaps devastating shareholder dispute down the road.

 

Contact us at jason@vspltd.ca or www.vspltd.ca to find out more about the valuation process and the types of valuation reports that CBVs provide.

Business Valuation – Critical to Enhance Value and Manage Wealth

As a business owner, the value of your business likely represents a significant portion of your wealth.  According to a publication by Mercer Capital:

"About 75% of all private equity is owned by households for whom it constitutes at least half of their total net worth. Households with entrepreneurial equity invest on average more than 70% of their private holdings in a single private company in which they have an active management interest."  [1]

Enhancing and managing this privately held business wealth is critical to business owners and this process begins with an independent business valuation.

 

Value Enhancement

 

The process of enhancing the value of your business begins with a business valuation which provides a benchmark from which to measure value increases over time.  The valuation process will also identify key value drivers to focus on to enhance the value of the business.

 

Resulting value increases will provide a significant return on the investment in a business valuation and value enhancement initiative.  We have seen clients double their business value within a two year period http://jasonkwiatkowski.blogspot.ca/2013/12/how-to-double-value-of-your-business-in.html).

Potential purchasers will be very impressed if you have documented how you increased the value of your business over time and identified opportunities for further growth and value enhancement.  Your chances of attracting numerous suitors and securing a deal for top dollar will be greatly increased.

 

Wealth Management

 

In order to effectively manage your wealth you need to know the value of your assets, including your privately held business.  Annual fees are paid to wealth managers to manage your liquid investments (e.g. publicly traded securities).  Monthly statements are provided setting out the value of these investments to assist with decision making.

 

Privately held business owners often spend significant time managing the business but little time managing the wealth associated with their business.  An effective wealth management strategy allocates a percentage of the value of the business to managing this privately held wealth.

 

The One Percent Solution suggests recommends for business owners to invest 1% to 2% of the value of the business towards a "wealth management budget" which includes, among other things, an annual business valuation and monitoring critical success factors and key value drivers.

 

 

All business owners will one day exit their business.  An independent business valuation can help you identify what percentage of your overall wealth is tied up in the business and identify key areas to focus on to enhance the value of your business.

Contact us at jason@vspltd.ca or www.vspltd.ca to find out more about the valuation process and how it can help enhance the value of your business and manage your wealth.

 
1.  Source: The One Percent Solution, Z. Christopher Mercer, 2007.

Business Valuation – Critical for Managing Value Expectations

Are you trying to build a business to one day sell for top dollar?  If so, it is critical for you to manage your value expectations and to be aware of how your business will be perceived and valued by potential purchasers.

 

Many business owners have unreasonable expectations regarding the value of their business.  According to RBC Business Succession Planning: Your Essential Roadmap, "It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."

 

Some business owners overestimate the value of their business and others actually underestimate the value of their business.  I have seen both situations before and there are serious implications to erring on one side or the other.  

 

Implications of Overestimating Value

 

Business owners that overestimate the value of their business may do so because they place too much emphasis on sweat equity or they ascribe value to the personal goodwill associated with the business.  Sweat equity refers to the effort and time put into the business and personal goodwill refers to the value associated with the personal skills and abilities of the business owner which are not commercially transferable.  A potential purchaser will not be willing to pay for the business owner’s value expectations if the company financials do not support them.

 

A potential purchaser is interested in future cash flows.  When the target’s cash flows (current or future) do not support the business owner’s value expectations, this creates a (potentially significant) gap between what a potential purchaser is willing to pay and what the business owner expects to receive.  The larger this value gap the greater the risk of not getting a deal done.

Implications of Underestimating Value

 

Business owners that underestimate the value of their business may do so for many reasons.  They may not understand how a potential purchaser values a target company.  They may not appreciate the value associated with various intangible assets they have created (e.g. customer relationships/contracts, intellectual property, proprietary technology, goodwill, etc.).  They may have based their value expectations on outdated or inappropriate industry rules of thumb.

 

A potential purchaser may see value that you were not aware existed, especially if you are dealing with a strategic purchaser. [1]  The price paid in an actual transaction is the result of a negotiation and a potential purchaser will rarely put forth their best offer initially.  If you are not armed with the ability to understand and justify the value of your business to a potential purchaser you run the risk of leaving significant money on the table.  You may be inclined to accept an initial unsolicited offer without attempting to negotiate a higher price based upon valuation principles and valid assumptions.

 

The consequences of overestimating or underestimating the value of your business can be severe.  An independent business valuation conducted 3 to 5 years prior to sale allows you to manage your value expectations and enter meaningful negotiations with a potential purchaser, provide reasonable justification for your value, increase your chances of getting a deal done and not leave money on the table in the process.

 

Contact us at jason@vspltd.ca or www.vspltd.ca if you want to manage your value expectations and minimize your risks with an independent business valuation.

 

 

1.  A strategic purchaser is one who believes it can enjoy post-acquisition economies of scale, synergies, or strategic advantages by combining the acquired business interest with its own.

5 Ways to Position Your Company to a Strategic Purchaser

Facebook’s recent acquisition of WhatsApp for $19 billion represented the largest-ever acquisition of an Internet messaging service company in history.

 

WhatsApp allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks.  This can save people who travel, or live in emerging markets, hundreds of dollars a year.  As a result, WhatsApp is adding about one million new users per day.

 

At the time of the acquisition in February 2014, WhatsApp had some 450 million users and, after the first year, charges users a subscription of $1 per year.  Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue.  Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?

 

It is possible that Facebook sees the opportunity to sell more Facebook ads because of the information they gather from WhatsApp users.  Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion.  Presumably Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp.

 

Therein lies the definition of a strategic acquisition.  Most acquisitions run a predictable pattern of industry norms, but a strategic purchaser can pay a significant premium for your business because they are looking at your business for what it is worth in their hands.  Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic buyer is calculating the economic benefit of combining your business with theirs.

 

There can be many "strategic" reasons why a larger company might want to buy yours. Here are 5 to consider:

1. To control their supply chain (i.e. you are a key supplier)

In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million.  This allowed Starbucks to be less dependent on one of its suppliers.

2. To enhance sales (i.e. you provide an opportunity for the purchaser to increase its sales)

In 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper.  AOL wanted to give its advertising sales people more inventory to sell and HuffPo had 26 million unique visitors a month.

3. To make their products look sexier (i.e. your product enhances the purchaser’s products)

In 2011, Microsoft bought Skype for $8.5 billion even though Skype was losing money.  It is possible that Microsoft expected to sell more Windows, Office and Xbox products by integrating Skype into everything they already sell.

4. To enter a new geographic market (i.e. you offer an expansion port for the purchaser)

In 2012, Herman Miller paid $50 million to acquire POSH Office Systems (a Hong Kong based designer, manufacture and distributor of office furniture) in order to get a foothold into the world’s fastest growing market for office furniture.

5. To get a hold of your employees (i.e. your employees are valuable to the purchaser)

Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.

Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash.  You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in a specific purchaser’s hands.

 

Curious to see what your business is worth and how you might improve its value to both strategic and financial acquirers? Contact us at jason@vspltd.ca or www.vspltd.ca.  You can also complete the Sellability Score questionnaire and we’ll send you a custom report complete with your score on the eight key drivers of Sellability.  Take the test now: http://www.sellabilityscore.com/vsp/jason-Kwiatkowski.

10 Reasons to Invest in a Business Valuation

Many business owners do not know the current value of their business, which can represent a significant portion of their overall wealth.  Worse yet, many business owners will grossly overestimate or underestimate the value of their business.

 

A Chartered Business Valuator (CBV) or Accredited Senior Appraiser (ASA) can provide you with this extremely valuable information.  Some business owners are reluctant to undertake this exercise because of the cost.  They do not appreciate that the benefits of obtaining an independent valuation can far outweigh the cost.

 

Obtaining an independent, professional business valuation for planning purposes does not have to be an expensive endeavor.  The cost will depend on the size and complexity of the business and the type of report that is required.  The cost to have a CBV prepare a Calculation Valuation Report, however, can be quite reasonable and this type of valuation report is generally sufficient for planning purposes.

 

Obtaining an independent business valuation and understanding the value of your business is one of the cornerstones of an effective exit planning process.  There are many reasons to invest in a professional business valuation, including:

 

1. Manage value expectations – an independent valuation can increase your chances of getting a deal done since many business owners will overestimate or underestimate the value of their business
 
 
2. Wealth management / enhancement – a valuation helps to identify key value drivers and provides a benchmark for measuring value enhancement
 
 
3. Shareholder buy-out or dispute – provide a value for shareholder buy-out or, more importantly, help avoid potential future legal disputes over value (i.e. full disclosure to all shareholders)
 
 
4. Matrimonial separation or dispute - provides support for value of the business to be included in net family property (NFP) statement or, more importantly, help avoid potential disputes over value upon separation
 
 
5. Pre-sale planning - buyers will only pay top dollar for the most attractive businesses.  A valuation can help document the increase in value over time and help the business become more liquid
 
 
6. External sale - use as a basis for negotiations with potential purchasers (e.g. determine asking price, assess unsolicited offer, etc.)
 
 
7. Internal sale - establishes a price for a management buy-out, employee share ownership plan or transfer to the next generation
 
 
8. Tax and estate planning - provides support for the value being transferred and acts as insurance for potential disputes with CRA (e.g. estate freezes, reorganizations, related party transactions, etc.)
 
 
9. Life insurance coverage - provides guidance for amount of life insurance coverage to obtain (e.g. key person, fund buy-sell agreement, fund taxes on death, etc.)
 
 
10. Trustee / executor protection - protection against possible estate administration tax (EAT) reassessments
 

The benefits of having a professional valuation far outweigh the costs.  In our experience, a Calculation Valuation Report is suitable for planning purposes and can generally be prepared for less than $10,000.  The valuation process can help uncover key value drivers to potentially double the value of your business within a few years.  Two of our recent clients at VSP were able to double the value of their business in a two year period.

 

Obtaining a professional valuation can also help minimize the legal and other expert fees if you are ever faced with a shareholder dispute or matrimonial separation.  The value of the business is often a very contentious issue in these matters and legal and expert fees (i.e. for a business valuator) well in excess of $10,000 are routinely incurred as a result of this issue alone.

 

Follow me over the coming weeks as I explore the above noted reasons in more detail.  Contact us at jason@vspltd.ca or www.vspltd.ca if you would like to maximize the value of your business and minimize potential legal and expert fees in the event of a separation (shareholder or matrimonial).

 

 

VSP to Make Guest Appearance on Exit Coach Radio

At VSP we are committed to helping business owners prepare for a smooth exit from their business.  As a certified exit planning advisor with professional business valuation designations in Canada and the United States, I believe that having realistic expectations with respect to how a potential purchaser would value your business and knowing how to enhance the value of your business before exit is critical to ensuring a smooth transition to new ownership.
 

Proper planning, including obtaining an independent business valuation, is also critical for avoiding potential disputes and costly litigation (matrimonial or shareholder disputes).  Far too often I have seen spouses and business partners  spend a significant amount of time, effort and money in litigation over disputes regarding, among other things, the value of the business.  This is one of the reasons why we developed the Exit Starter Program at VSP.
 

I am also very pleased to announce that, as a representative of VSP, I will be a guest on "The Exit Coach Radio Show" on Wednesday, February 26, 2014 at 3:25 pm EST.
 

Bill Black, host of The Exit Coach Radio Show, interviews top Advisors about various tips, ideas and precautions for age 50+ business owners.  He has over 275 episodes to date.  I will be talking about planning strategies that are important for business owners to grow and protect the value of their business.
 

I hope you will be able to tune in.  You can listen live from your computer by going to www.ExitCoachRadio.com and click on "live show" at the　bottom of the page.  If you miss the live show, a recording of it will be posted a few days later.
 

I look forward to your feedback.  Contact us at www.vspltd.ca or jason@vspltd.ca to find out more about the VSP Exit Starter Program or to speak with a certified exit planning advisor with business valuation designations in Canada and the United States.