The announcement by the CRA that businesses that fall over a threshold must electronically file their HST returns is a long time coming.  From the government’s perspective I can’t understand why they didn’t do this earlier in order to get their information and payments earlier similar to personal taxpayers e-filing their income tax returns.  The government told us they wanted individuals to e-file because it made things more productive and easier at CRA, so this seems like a natural progression.  I’m surprised though they didn’t make it mandatory for all businesses because it would actually probably reduce their collections for late filers of GST/HST.

For GST & HST registrants with $1.5 million total supplies purchased for a fiscal year you will be required to electronically file their GST/HST returns.  The exception to this rule would be charitable organizations.

Currently there are 5 methods of filing a GST / HST return:

1. Electronically (netfile)
2. Telephone (telefile)
3. Paper
4. Electronica data interchange (EDI)
5. Internet file transfer

Another major exception will be for builders in Ontario and BC which currently provide a GST rebate or credit paid by home purchasers will have to Telefile or Netfile.

If you want to amend a prior GST / HST return you must do so in writing to CRA.

Penalties from CRA will apply if you’re supposed to electronically file your return.  The exact amount of penalties has yet to be determined.

If you currently aren’t filing electronically your return you can do so July 1, 2010 if you choose.

For Ontario and BC registrants you must Netfile your returns if the following apply:

• Registrants that are required to recapture the input tax credit (ITC) from the provincial portion of the HST.
• Builders who must report transitional housing information (transitional tax adjustment or transitional new housing rebate)
• Builders who have a “grandfathered clause” where they made new home sales and the home buyer cannot claim the GST / HST rebate

What Registrants have to Recapture ITC’s?

For the first five years after the implementation of the HST, organizations in BC and Ontario who have greater than $10 million taxable sales and /or financial institutions will not be able to claim ITC’s on the provincial portion ie. BC 7% for certain supplies such as:

1. Telecommunication services, except toll free numbers and internet access
2. Energy ie. (Natural gas, electricity) except if you’re a farm or the energy is used to manufacture goods for resale.
3. Road vehicles weighing less than 3,000 kg
4. Food, beverages, and entertainment.

After the 5 year period, full ITC’s will be able to be claimed over a 3 year phase in period.

Businesses will have to report Recaptured ITC’s as a Result on the HST form

More policies is a result of these exceptions and phase in periods which businesses small and large need to pay attention to when July 1st comes along.

Links:

CRA News Release: http://www.cra-arc.gc.ca/nwsrm/rlss/2010/m01/nr100104b-eng.html

Simply Accounting: http://www.simplyaccounting.com/community/forums/t/7306.aspx

Quickbooks 2010: http://quickbooks.intuit.ca/accounting-software/2010-quickbooks-features.jsp

CRA: GST/HST Administration Checklist: http://www.cra-arc.gc.ca/E/pub/tg/rc4346/rc4346-09e.pdf

Deloitte: New Housing Rebates & Transition rules: http://www.deloitte.com/assets/Dcom-Canada/Local%20Assets/Documents/Tax/EN/ca_en_tax_BCHST_NewHousingRebate_TransitionalRules120909.pdf

Written by Richard Wong, CMA                            Email: rwong@firstchoicecapital.ca

Private company financing is in many ways easier to get as you don’t have the regulatory hurdles you would as a publicly traded company on a stock exchange.  The most important reason why some companies stay private instead of going public though is being able to keep control of the business, making decisions which generally are best for the long term success of the organization.

Shareholders complain to management and directors through primarily stock performance, rather than necessarily the business performance.  Stagnant growth or maintaining profits are not sexy enough for most stock analysts and shareholders, while in a private company the owners’ can think about the long term health of a company and make decisions based that way.  Think of it another way, the owners’ don’t have golden parachutes, their retirement strategy is to build the strength of their companies in order to hand it down to family or sell it for a healthy profit.  This kind of decision also mirrors how private companies are financed such as below:

1. Credit card
2. Operating lines of credit
3. Operating assets lease financing
4. Accounts receivable financing
5. Mezzanine Debt
6. Subordinated debt
7. Private equity financing

These financing methods apply to start ups to established companies and each a have purpose in the growth or the business life cycle and also reflect the amount of equity a company is willing to give up in order to attain growth.  The earlier stages are boot strapping a company to growth with equity being grown by the owners and the later stages are potentially giving up equity for orderly succession or exit strategies.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

Growing up in a small business environment, watching your parents work harder and harder to make a good life for us as children I believe that my parents probably worked too hard and didn’t give themselves the opportunity to maximize the value of their businesses before retiring.

Succession planning should start earlier, not at age 65 when people retire, but several years before in order to determine an exit strategy which either passes along the family business to the siblings or to get the businesses ready for sale.  In Canada according to a CFIB (Canadian Federation of Independent Business) 70% of small businesses owners will retire in the next 5 years.  That provides 2 business scenarios for small business owners, one, that the businesses will be hopefully passed along to one of their siblings in order to quickly deal with the succession planning issue or two, that there will be a lot of small businesses coming up for sale.

But I believe that one of the biggest hurdles to succession planning is that small business owners who have had businesses for a long period of time actually think of their businesses as being part of the family like another child and there’s the emotional tug of war on deciding to give up the business even to their children if that’s the route they choose.  The more difficult decision is to decide to sell the business to an outsider and that’s probably one of the biggest reasons why people outside the business might view it as procrastination, but to the small business owner it could be more an emotional factor.  My parents were already past retirement age when they decided to sell some of their businesses and hang onto a few others.

This delay hurts both the employees of those businesses as well as the owners in that their is a definite lack of plan of going forward and the owner’s passion has already waned and they’re no longer really interested in running their businesses, but don’t want to necessarily letting go.

These businesses have been profitable but the owners’ have had a hard time taking time away from the day to day running of the business, or taking a step back to look at their business at the 10,000 foot level and trying to setup their business to become saleable at the most attractive price.

A study released late last year by business transition specialists ROCG Americas found only one in 10 owners received a price for their business near what they wanted or expected. The primary reason given was improper or lack of planning.

ROCG conducted the survey in North America and found that businesses with revenues between $1 and 100 million said that they were either too busy to plan for a business sale or it was too early to start thinking about it, even though 84% of them said it was important to their retirement plans.

“Many business owners are not aware of the complexity involved in the succession planning process, particularly in executing a divestiture transaction,” says Michele Middlemore, vice-president of Aon Corp.’s M&A Transaction Advisory Group. “Almost always, they underestimate the time and work and difficulty involved in getting something like that done. More often than not, they tend to postpone dealing with it and are not prepared adequately when the time is upon them.”

Businesses should be planning 2 or 3 years in advance for the divestiture.

One of the big ideas to put in place is the movement of the value of the business is from the business owner to that of the business itself.   Since small business owners are generally the drivers of the business, it’s usually been in the sales and marketing roles and this is one of the areas which has to be transitioned over to the company.  This is easier said than done, in that one quite often that there isn’t the bench strength to take over and this has to be brought into the company.  Their might be changes in technology which might be needed to brought into the company as well to allow to compete better.

One can look at the succession planning in a way is like embarking on a new business plan and here a corporate financial advisor can help with getting an independent valuation of a business to let owners know where the strengths and weaknesses lie and what to expect as a potential starting point for a dollar value of a business sale.

According to the Business Development Bank of Canada, business succession is a process that requires thought, planning and time to arrange and execute: “Whatever your definition of success, making the commitment to let go of the business and place it in the hands of someone else is perhaps the critical factor that ensures your business transition goes smoothly and profitably,” the bank notes.

Just remember though that succession planning shouldn’t be determined by what the economy is doing or the stock markets, but by personal circumstance, if you’re ready to retire, then you should be planning for it in advance by 2 to 3 years.  The process is a complex one and is similar to building a new business plan, except that you’re trying to help build for the next set of owners’ to succeed and by doing so you and your family will get top dollar for your business you have built over the years.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

In the sale or purchase of a private company its still necessary to use best practices in order to have the parties feel good about the transaction.  Using the services of a corporate financial advisor, a tax accountant, a corporate lawyer who work together as a team from the beginning will provide you with the ability to see things that are often overlooked by purchaser in a company.

In a past transaction the sole shareholder(owner) of a private company sold his shares to an independent purchaser and the capital gain realized was eligible for the small business corporation shares capital gains deduction.  So far so good for both parties.

However, one of the most common issues which is misunderstood by both the purchase & seller is the “Due to/from shareholder” account.  On the surface it seems like a fairly straight forward liability account, the credit balance in the account is owed to the shareholder.  Here is where the 3 professional advisors, a corporate finance lawyer, the tax accountant, and the corporate financial advisor know that this is a liability like any other liability and is owed to the shareholder.  Some accountants have trouble understanding this because they assume that the company had sold its shares, but the shares are separate from its liabilities.

Another effect of this “credit balance” in the Due to Shareholder account is when the new owner decides to draw money out of this account he will have been deemed to have received a “taxable benefit” under Section 15 of the Income Tax Act. Why? The withdrawal transaction isn’t a return of capital it’s a debt owed to its the former owner.  The capital gain for the seller of the business in this situation is also overstated which the capital gains exemption the owner has here.

An example might help here: the seller of the business sells her business for $500,000 and the owner has a credit balance of $150,000 in the Due to Shareholder account.  In the sales agreement the buyer of the business should ensure that the agreement reflects an allocation of the purchase price of $150,000 to purchasing the debt of the Due to shareholder account and the remainder allocated to the purchase of the seller’s shares.  The reason is that the purchaser has a debt owed by the company to herself and when she wants to withdraw some of it, it will be tax free unlike the prior situation.

This unfortunate situation can be reversed, but if the parties use best practices and have a coordinated team of advisors working from the beginning  it will save time and money for both the buyer and the seller.  But sometimes, the transaction go through due to no advice for either party and the consequences are a tax project case resulting in more money spent on a tax advisor later.  In a case documented in CMA magazine an accountant figured they fixed this by exchanging the debt for more shares, but caused more tax problems in the allowable business investment loss  issues and failed to take into account subsection 80(2) of the income tax act which allows the debt to be settled for the fair market values of shares issued.

The lesson here is that it is easier to have a team in place before you decide to do a sale or purchase of a private business to advise you on the issues, because they’re not as straight forward as you may think.  You can’t substitute the expertise of a group of advisors to help you save you money and headaches in the long run.

Written by Richard Wong, CMA      rwong@firstchoicecapital.ca

According to the BDC small medium sized businesses spend 45 to 65% of their revenue on purchasing materials and services.  This large percentage of the total costs of a business means that small savings, even 1% can mean instant addition to the bottom line but in today’s economy you can achieve even greater savings in the 10% to 20% range is possible.

Try some of the following to cut your spending:

1. Have your controller or hire a consultant do an expenses analysis
   - Review all parts of the product or service cost, break them down individually into:
   - Raw materials costs
   - Taxes, brokerage, tariffs, duties
   - Freight
   - 3rd party warehousing/logistics handling costs
   - Extra vendor charges
   - Vendor payment terms
2. Review your purchasing process on how to evaluate the best choice
   - What type of process is used for deciding to use one supplier over another?
   - How many people need to be in the decision making process, the fewer the number of people, the less the overall internal cost?
   - When deciding to purchase equipment is there a “Net Present Value” analysis of the different choices which examines the benefits over the asset’s life?
   - Have your staff included used equipment purchases as an alternative to purchasing new? Have they visited auctions?
3. Potentially sources from offshore countries
   - Start looking to buying from other countries to compare suppliers.  BDC studies show that only 42% of Canadian companies are saving money, but you could be one of them.
4. Review standardizing the number of parts in your product
5. Reduce the number of suppliers & forge strategic partnerships with a few to get better pricing, terms, or delivery.
6. Think about using technology to help track your business

Written by Richard Wong, CMA   email: rwong@firstchoicecapital.ca

Short updates on Life Sciences funding for March 2009.

BiOptix Diagnostics, Inc.: Series A $3M

BiOptix (Boulder, CO) a commercial focused developer of an array-based biomolecule detection system that addresses many markets that currently cannot obtain the needed sensitivity and throughput in a single solution, closed a $3M Series A finacing.

NeoVista, Inc.: Series D $18M

NeoVista (Fremont, CA) a clinical-stage device company focused on epimacular beta radiation for the treatment of wet age-related macular degeneration, closed a $18M Series D financing.

Neuraltus Pharmaceuticals, Inc.: Series A $17M

Neuraltus Pharmaceuticals (Menlo Park, CA) a preclinical-stage developer of small-molecule drugs focused on Amyotropic Lateral Sclerosis and dyskinesia, closed a $17M Series A financing.

Nexstim, Oy: Series C $7.9M

Nexstim (Finland) a commercial-stage developer of non-invasive brain imaging technologies focused on cortical mapping prior to surgery, closed a $7.9M Series C financing.

Atritech, Inc.: Series E $30M

Atritech (Plymouth, MN) a clinical-stage medical device company focused on developing minimally invasive technologies designed for the prevention of atrial fibrillation related stroke, closed a $30M Series E financing.

Ikano Therapeutics, Inc.: Series B $9M

Ikano Therapeutics (Lexington, KY) a clinical-stage nasal delivery platform company focused on seizures and pain, closed a $9M Series B financing, the final tranche of a $18M round.

GetWellNetwork, Inc.: Series C $10M

GetWellNetwork (Bethesda, MD) a commercial stage telemedicine provider of interactive patient care solutions, closed a $10M Series C financing.

GlycoVaxyn, AG: Series B $22M

GlycoVaxyn (Switzerland) a preclinical-stage company developing vaccines focused on bacterial caused disease, closed a $22M Series B financing.

Surface Logix, Inc.: Series E $15M

Surface Logix (Brighton, MA) a clinical-stage small molecule company focused on metabolic and cardiovascular disease, closed a $15M Series E financing.

Proteon Therapeutics, Inc.: Series B $38M

Proteon Therapeutics (Waltham, MA) a clinical stage biopharmaceutical company focused on renal and vascular disease, closed a $38M Series B financing.

The economy has caused a credit crunch for businesses large and small so the one thing that all businesses should do is to get cozier with your banker.  This can take the form of calling more often, visiting, inviting your account manager to your business premises, anything which will provide more real world contact with your banker.

The one thing that is definite right now and that account managers are under more pressure to ensure their clients are worthy credit risks and are up to date in their monthly bank reports.   So now more than ever, its important to better your relationship with your banker, even if you don’t need more financing at this time, but very important if you think you may need to re-finance,  get waivers, or get amendments to their current financing.

Banks through their own databases, but also through credit bureaus have statistics on every industry and if you’re an underperforming company compared to the average in your industry, you may have already gotten a call to ask you whether you really do need for example a $4 million credit line, when you’ve only used $1 million for the past 3 years, yet your debt to equity ratio is higher than the industry average.  Not a good sign, but manageable if you take the time to provide comfort to your banker.

It’s hard to think of your banker as a partner, but they really are, they want to see you succeed, not fail, so having them understand your business and your competitive advantage compared to your competition is very much smart business.  So here are some steps to take to improve your banking relationship:

1. Make Verbal Contact with Your Banker
   - Call your account/relationship manager at least once a month or even better twice.
   - If your company isn’t doing well it’s even more important to outline your strategy to your banker to improve and give them comfort in what’s your business direction.
2. Build Trust with Your Banker
   - Private companies have quite often reported the bare minimum information to their banks, because they have wanted to remain private in all respects.  In today’s economy, in order to get help either re-financing or potentially finance acquisitions its time to bring down the curtains and let the bank see what you’re doing well.
3. Prepared Detailed Forecast Information
   -  Public companies are used to sharing information with their banks so for them this less of an issue because of the quarterly presentation done by CFO’s for their public companies, but some have gotten away from this practice in the last few years but should think about re-instituting it only for the confidence it shows to stakeholders about their business direction.
   - These forecasts should include various scenarios of financial, operational, and employee headcount variables.
   - The forecasts should include worst to best case scenarios going out at least 2 years.
4. Hire Reliable, Knowledgeable Financial Advisors
   - Today its a good practice to ensure that information is presented accurately and consistently by advisors who understand your industry, your business, and advisors who have gone through economic downturns before where maybe your current management haven’t.  In today’s times, you better know you’re making decisions on good reliable financial information.
5. Communicate, Communicate, Communicate!
   - Now is the time to be proactive, treat your banker as your partner in business, keep them informed of major milestones, and what you’re doing to beat the current economic environment.  Be a leader, manage your banker rather than have the bank manager you!

Written by Richard Wong, CMA    rwong@firstchoicecapital.ca

In today’s economy people who are looking to start businesses here all over the media that the credit crunch has hit everyone and it’s impossible to get financing. In our business we certainly see that for existing clients with large banks as their creditors it certainly is more trying in determining whether or not to cut back on costs, or deciding on going after acquisitions.

The basis for capital has always been based on “How’s your credit worthiness and what’s the Collateral.”  In Vancity’s case Community business loans are based on “Character & Business Viability.”

This major difference in helping small businesses in BC has amounted to loans of over $13 million for 800 companies.

The question is why would Canada’s largest credit union with over $14 billion in assets and over 390,000 members why would they do this, simply because by helping out small businesses establish themselves in the first 5 years they will in turn likely turn these customers into larger businesses with larger operating credit lines, create more jobs, and help the credit union grow as well.

If larger banks had a small portion of their business directed to helping smaller new businesses they maybe able to do the same, possibly, but Vancity has taken the risk and it seems to have provided a service where potential small business owners can look to for help in financing.

Written by Richard S. Wong, CMA      rwong@firstchoicecapital.ca

Facebook’s initial failed attempts to takeover Twitter were because the most common reason why mergers & acquisitions fail, VALUATION differences. This is the main reason why other mergers or acquisitions fail because of the parties not being able to agree on what each brings to the table. That’s why Facebook’s attempted acquisition of Twitter didn’t materialize this time around, but don’t be surprised if this marriage of social media companies still happens.

Simply, Facebook believed that their private company stock value was worth a higher amount than what Twitter management believed and when you’re trying to purchase another company primarily with company stock it really is a moving target because there is no real 3rd party independent opinion of what the common stock is worth, like a public company stock.

Twitter was in active talks with Facebook for a takeover based on a value which is still a moving target just like any other private company where it is hard to put a independent value on its common stock. However, Facebook for stock option purposes where employees wouldn’t be taxed had valued its common stock at $3.7 billion after Microsoft’s investment which calculating backwards had Facebook’s stock valuation approaching $15 billion, but that was in a hot stock market over a year ago.

Problem with Twitter is that Facebook offered them $500 million for the company which apparently was a good number until Facebook pegged its own company value at $8 or $9 billion making Twitter shareholders’ worth of Facebook’s company less. This is a common issue in negotiations for many private companies who are looking to sell a share of their company or their company in whole. The sellers’ valuation is commonly based on the company’s best financial year and multiplying by a number to get a sales price value, whereas a buyer usually will try to use either the company’s worst year or projections to help bring the price closer to what they want to pay.

In high growth companies like Facebook who are continually trying to organically grow and through acquisitions don’t be surprised if they come back to Twitter and give them a higher dollar amount based on dropping technology stock values and Twitter has something Facebook wants is the micro-blogging technology, but most importantly growing user base of Twitter.

Mergers & acquisitions whether its for large private company like Facebook or your small business in downtown USA or Canada still have its issues trying to come to a mutually satisfying dollar value. However, for the smaller business be expected in this selling cycle to have purchasers ask for what’s called “Earnouts” and “Vendor Take Back Financing.” Earnouts are basically bonuses for the seller if the company reaches certain targets or milestones for anything from number of subscribers to EBITDA to Net Profit. Vendor take back financing is where the seller agrees to a price and will help the purchaser by financing a portion of the sell price which helps the purchaser get outside financing. These 2 negotiation tools were widely used before the last economic boom and expect them to come back if sellers want to sell their businesses quicker in this economic environment.

Written by Richard Wong, CMA      rwong@firstchoicecapital.ca

• Small businesses could be helped by a CFO, on a part time basis and that’s a virtual CFO or in person CFO could do.  The company size could be for 1 person to as large as 100 person firms.
  

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