First Choice Capital Advisors

10 Things You Should Know About the HST

Richard Wong — Thu, 13 May 2010 22:34:08 +0000

1. There will be 12% HST on the sale of all goods and services after July 1, 2010.

Under the proposed rules, HST will apply to sales of goods where ownership and delivery are transferred to the purchaser on or after July 1, 2010. If either ownership or delivery of the goods occurs before July 1, 2010, the sale will not be subject to HST regardless of when the customer is invoiced for or pays for the purchase.

HST will apply to services that will be performed on or after July 1, 2010. However, if substantially all (90 percent) of the service is performed before July 2010, HST will not apply. If services are performed over a period that straddles July 1, 2010, only the portion of the payment that relates to the services performed on or after July 1, 2010 will be subject to HST. Specific rules are proposed for funeral and cemetery services, passenger transportation services, and freight transportation services.

2. Obligation to charge HST on prepaid goods may start as early as May 1, 2010.

Vendors will be required to charge HST on prepayments received on or after May 1, 2010 in respect of goods where delivery and ownership will transfer on or after July 1, 2010 and in respect of services that will be performed on or after July 1, 2010 (unless substantially all of the service is performed before July 2010).

3. Theoretically many products should go down in price.

Because farmers, manufacturers, and other businesses will receive a 12% tax credit (GST + HST) for the HST they pay, the cost of making their products will go down. Economic research has shown that in other jurisdictions where an HST has been implemented, the overall prices paid by consumers on many products went down, as these lower costs were passed along to customers.

4. All businesses, including small businesses will benefit from reduced paperwork and lowered costs by now being able to claim HST tax credits at a higher rate than before.

5. Electronic filing of HST/GST returns

Commencing July 1, 2010 you will be able to file your HST/GST returns electronically. For certain businesses this will be mandatory:
1. Those with annual sales greater than $1.5 million
2. Certain companies that are required to recapture the provincial portion of HST
3. Builders affected by the transitional measures applicable to housing.

6. Low income individuals and families will receive a cheque four times a year to reimburse them for the HST they spend for a total of $230. Income must be under $20,000.

7. Rebate on Brand new homes

Homes sold by a builder to the first owner of up to $525,000 will receive a 5% rebate on the provincial portion of the HST, and new homes over $525,000 will be eligible for an HST rebate of $26,250. Re-sales of existing homes that are simply changing hands will not have HST applied to the purchase price.

8. There are Point of Sale Rebates for 7% of HST. This is Unique to BC.

Some of these are:

1. Motor Fuels
2. Books
3. Childrens clothing, footwear diapers, car seats
4. Feminie hygiene products

9. There are complex transitional rules for:

1. Leases and licences.
2. Certain prepayments are not subject to HST
3. Sales of Intangible Personal Property
4. Grandparenting of Home sale contracts entered into prior to November 18., 2009.
5. PST paid on construction costs prior to July 1, 2010.
6. Discretionary Investment Management Services paid after December 15, 2010.

10. Self assessment is required for Certain contracts from October 14 , 2010.

In certain circumstances, businesses will be required to self-assess the provincial component of the HST with respect to prepayments made between October 14, 2009 and May 1, 2010:

1. where businesses use the quick method of accounting to account for their net tax;
2. where inputs are acquired for use in making exempt supplies; and
3. where a business whose annual taxable sales are greater than $10 million acquires inputs that are subject to ITC restrictions.

There are negative impacts on certain businesses that are exempt such as Health Care Professionals.

Sources of information on the HST:

Deloitte Canada website
Point of Sale rebates see Deloitte pdf here
New housing rebates see Deloitte pdf here

Health care professionals face special problems according to Deloitte
Sales tax harmonization material from PriceWaterHouseCoopers is found here

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

HST & How it Helps Businesses & Citizens

Richard Wong — Wed, 28 Apr 2010 00:06:45 +0000

HST vital to sustaining economic prosperity in BC

The BC government intends to harmonize the provincial sales tax (PST) with the federal GST, effective July 1, 2010. This will result in the elimination of the PST and the establishment of a new, single harmonized sales tax (HST) initially set at a rate of 12%.

The business associations listed at the end of this document, and the tens of thousands of enterprises – large and small – that they represent, are supportive of moving to the HST

because we believe it will mean a stronger economy, more jobs, and higher incomes over time. There are a number of reasons why eliminating the PST and adopting the HST makes sense.

Increased competitiveness: By removing the PST that companies now pay on their inputs, the HST will make British Columbia more competitive. While the PST is often viewed as a “consumption” tax, in fact it applies to both consumption and production. Approximately 40% of PST revenue is paid by businesses on goods and services which they purchase to run their operations – everything from equipment, machinery, vehicles, and building materials to office supplies, furniture, energy, legal services and more. As this PST-related tax burden is removed, the vast majority of businesses will be in a better position to invest, to grow, and to sustain and create jobs.
More investment: A second and related reason to adopt the HST is that it will stimulate investment. Experience in Atlantic Canada and other jurisdictions confirms that shifting to a value-added sales tax like the HST paves the way for increased capital spending on machinery, equipment, structures, new technologies, and other productive assets. Additional business investment should lead to faster economic growth, more jobs, higher productivity, and greater exports – all of which are good for workers and consumers alike.
Reduced ‘paperwork’ burden: As British Columbia integrates its sales tax with the federal GST, compliance and ‘paperwork’ costs will decline for tens of thousands of BC businesses. Under the present system of separate provincial and federal sales taxes, businesses are forced to deal with two different sets of tax rules, administrative authorities, and compliance requirements. Tax filing, compliance, and other regulatory costs will be significantly lower under the HST, which should be especially beneficial for smaller businesses.
Federal government funding: By moving to a harmonized sales tax, the province is in line to receive $1.6 billion from the federal government. This reflects a longstanding federal policy to encourage the provinces to integrate their sales taxes with the GST in order to strengthen the Canadian economic union. Additional federal dollars will be helpful in allowing the province to maintain important public services and to pay for measures that may be used to facilitate the transition to the HST for a small number of vulnerable industry sectors.
Aligning with other provinces: Finally, the fact that Ontario plans to legislate its own version of the HST next year, and that Quebec and three Atlantic Canadian provinces did so in the late 1990s, is also an important factor. These provinces represent about 70% of the Canadian economy. The HST will put BC on a more even tax footing within Canada and ensure that needed investment dollars and jobs aren’t lost to other jurisdictions.

A healthy business sector is a vital part of any thriving economy. By providing jobs and buying inputs from local suppliers, competitive enterprises make a big contribution to the tax base that governments rely on to pay for programs and services. The HST promises to strengthen the foundations for BC’s high standard of living by helping to expand the economic pie and spurring the creation of more good-paying jobs.

Consumption taxes are sometimes criticized for being “regressive,” by disproportionately affecting lower income households. To address this concern, the provincial government has

pledged to provide a new, refundable HST credit which will be paid quarterly along with the existing GST credit, to lower income individuals. We believe this represents a balanced and

equitable approach to ensuring that lower-income citizens do not face an added economic burden from the HST.

In conclusion, while we recognize that a few industry sectors may face challenges as the HST is implemented, overall we are convinced the HST will generate positive economic results for businesses, consumers, and workers in British Columbia in the years ahead.

Re-printed with permission.

Email: Richard Wong, CMA rwong@firstchoicecapital.ca

GST/HST filers must electronically file July 1, 2010

Richard Wong — Tue, 09 Mar 2010 18:49:58 +0000

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:

Electronically (netfile)
Telephone (telefile)
Paper
Electronica data interchange (EDI)
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:

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

Global Sourcing a Way to Reduce Manufacturing Costs

Richard Wong — Mon, 11 Jan 2010 17:41:09 +0000

Global Sourcing a Way to Reduce Manufacturing Costs if You Seize the Opportunity

Global sourcing is a term used to describe practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and low trade tariffs.

For global companies who have already spent lots to time, energy, and money in setting up manufacturing plants and distribution systems to take advantage of these efficiencies they have increased their competitive advantages over their smaller competition. This same competitive advantage can be found in companies who provide global manufacturing sourcing that can bridge the gap between the different countries and cultures. One of those knowledge based companies is Padtech based in Delta, B.C.

Padtech transformed themselves from a 20 year manufacturing company who saw the need to make the switch from a small manufacturer to becoming knowledge based global manufacturing sourcing company. What is a manufacturing sourcing company and where does it fit in the manufacturing industries? Good question, we asked Dan Lionello, President of Padtech what the concept is and how they reduce the cost of manufacturing for its clients.

Padtech combines its expertise of understanding the manufacturing process from beginning to end and using the knowledge of manufacturing workflow to develop a process to in the last several years which combines taking a client’s engineering drawings into a common manufacturing production document, with its relationship based global network of manufacturers in foreign countries to create a “Manufacturing ecosystem” which has saved its clients anywhere from 15 to 50% on the manufactured cost of their goods.

Common examples of globally-sourced products or services include: labor-intensive manufactured products produced using low-cost Chinese labor, call centers staffed with English speaking workers in the Philippines and India, and IT work performed by programmers in India, China, and Eastern Europe. While these examples are examples of Low-cost country sourcing, global sourcing is not limited to low-cost countries.

The global sourcing of goods and services has advantages and disadvantages that can go beyond low cost. Some advantages of global sourcing, beyond low cost, include: learning how to do business in a potential market, tapping into skills or resources unavailable domestically, developing alternate supplier/vendor sources to stimulate competition, and increasing total supply capacity. Some key disadvantages of global sourcing can include: hidden costs associated with different cultures and time zones, exposure to financial and political risks in countries with (often) emerging economies, increased risk of the loss of intellectual property, and increased monitoring costs relative to domestic supply. For manufactured goods, some key disadvantages include long lead times, the risk of port shutdowns interrupting supply, and the difficulty of monitoring product quality.

It is some of these pitfalls or hurdles which have prevented many smaller Canadian companies from exploring further the potential manufacturing partnerships in other parts of the world. Padtech however, has created this system of where they become the middleman between the North American customer and its network of partners throughout the rest of world to ensuring the manufactured products live up to the specifications and quality required by its customers.

Padtech is essentially an outsourced service with a major advantage over a smaller company trying to do this on its own, it’s the relationships built by them over the last few decades in other cultures and their ways of doing business to ensure that their customers get what they want at the time they want. They have learned to build those bridges with the other cultures which in North America many companies do not take only a year to build but in some cases several years before a supplier will do business with an unknown prospect to them. Padtech simplifies the process even further by developing a framework which takes the engineering requirements and developing a blueprint which engineers in other countries can decipher and use much more easily than a standard engineering document from a company in North America. What this also does is reduce the risk in prototyping and gives more transparency to the process instead of having the whole process done in house.

For global sourcing the investigation is definitely worth the risk as globally production is growing and being able to potentially reduce the manufacturing cost while maintaining product quality might be able a strategy to improve profits at the end.

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

Padtech logo

Do you have the right salespeople?

Richard Wong — Sat, 07 Nov 2009 00:39:05 +0000

Our last TEC Advisory board meeting we discussed the usual things such as how is business been this past month, what major issues are on the table & what you’re doing about it, and what major issues do your clients have at this time. Nothing out of the ordinary, except sales cycles are taking longer which leads me to ask the question how many companies out there currently have salespeople who have not been trained for those bad times? We all know its easy to sell during good times, for many it was make a couple of calls and get the deal signed, but now I would say that consensus around the table is that we haven’t seen sales cycles like this in over the past decade!

The point that was being made was that we need to start training our younger sales staff the art of sales and getting to the real needs and objectives of the prospect and letting them know that it will take longer to close sales in today’s business environment. The alternative is that are you leaning on your more experienced sales staff, or in other words people probably in their 40’s or 50’s who have been through tough economic times and know that they have to do a lot more digging to qualify prospects and know more sales techniques to better meet the needs of prospects?

Sales are tough today, do you have the right people, invested in the right systems, and training and touching customers more often to maintain those relationships? If not, your shareholders, owners, and bankers could be asking the more difficult questions of you.

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

Economy in Yo Yo mode for next year opined by a TEC Advisory Group

Richard Wong — Mon, 05 Oct 2009 05:48:39 +0000

TEC advisory group for CEOs meeting a day ago has the opinion that the economy in general that we are still in for more of the ups and downs of the stock market and economy in general. This advisory group includes professional service providers from mergers and acquisitions specialists, human resource consultants, group insurance providers, merchant banker, investment wealth advisor, business advisory coaches, CFO advisor, to CEO mentors.

The majority of the advisors in the room have over 20 years business experience and have gone through some of the downturns and definitely say that the major difference today in coming out of this last recession is that no one seems to believe that we’re on our way to a major recovery, that the recovery will have hiccups and the economy will go up and come down, maybe averaging zero percent growth for the next couple of years, but potentially income taxes might need to rise in order to continue to pay for continued government economic stimulus.

For a lot of business owners they have experienced a time period where there hasn’t been either constant of great growth and their sales teams haven’t had to work really hard and make several pitches to a prospect before they become a customer. For some regions of Canada, sales teams are being slowed down to several months before a prospect gives the okay to a purchase. For some inexperienced sales reps this is new territory and the adage of its cheaper to get a current customer to buy than to bring in a new customer is much more relevant in today’s world.

Statistics from various agencies have shown that the economies of the world have been propped up 100% entirely from the world’s governments economic stimulus plans. We question when the stimulus plans are done, whether or not consumer confidence will have increased to the point of taking over or whether more economic stimulus dollars will be needed.

The end result of stimulus plans will always be higher taxes, and this time around I am thinking that it will be individuals’ income taxes which will increase by a few percentage points rather than business. We need business in order for their to be employees to pay their taxes is always the rationale behind increasing taxes for individuals.

We can hope that consumer confidence will grow in the near future so government stimulus won’t be necessary.

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

Renewable Energy Co.s Getting More Investment Cash than Oil Co.s

Richard Wong — Thu, 04 Jun 2009 19:27:16 +0000

Renewable energy companies including solar, wind, biofuel, and others for the first time in 2008 got more investment capital than conventional oil & gas companies. Green energy companies received more investment funding than fossil fuel companies as per a report from the United Nations.

Clean technologies including wind, solar, and others attracted over $140 billion in new investment dollars while gas & oil attracted $110 billion. Over 1/3 of the green investment dollars were for European companies. This continues Europe’s forward thinking amongst government, people, and investors on how to find ways of getting greener. They are being closely followed now, by now China, India, and other countries rather than Canada and the United States.

Some of the reasons I believe is that Europe has long been using cap and trade systems for carbon credits while in North America most of us are still trying to understand the concepts of carbon tax and cap and trade. China and India out of necessity of trying to find alternative cheaper energy and less issues of disposal and pollution have embarked on it to help continue to grow their economies in this economic downturn.

Achim Steiner, executive director of the United Nation’s Environment Program said that this recent milestone of more investment dollars attracted to renewable energy is a tipping point for for global energy versus fossil fuels. He is also encouraged by African countries like Kenya and Angola have entered into the field.

United Nations though still believes that $750 billion needs to be spent between 2009 & 2011, especially when in 2009 so far renewables energy investment has only totalled $13.3 billion.

Even with the new investment dollars the industry wasn’t immune to the stock market downturn as investment capital dropped by 51 per cent to $11.4 billion and stock prices dropped by over 60 per cent according to the Global Trends in Sustainable Energy report done by New Energy Finance (NEF) in London.

The United States though is one of the leaders in wind energy investment with over $51.8 billion and $33.5 billion for solar energy. Solar energy investment rose by over 50 percent year over year.

Biofuel was the next most popular investment at $16.9 billion but has come across environmental and political issues regarding ethanol creation at the expense of farming crops and rising food costs.

The trend in 2009 is alarming though to the United Nations as renewables energy investment as they have forecasted that current investment would lead to about $95 billion to $115 billion in new investment.

Green Investment as Per Cent of Global Economic Stimulus is shown below in the table below:

Written by Richard Wong, CMA rwong@firstchoicecapital.ca

Reasons Why Private Companies Stay Private for Easier Financing

Richard Wong — Wed, 20 May 2009 21:00:14 +0000

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:

Credit card
Operating lines of credit
Operating assets lease financing
Accounts receivable financing
Mezzanine Debt
Subordinated debt
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

Succession Planning Best Way to Get Top Dollar for your Business

Richard Wong — Mon, 11 May 2009 17:52:40 +0000

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

5 Big Business Valuation Myths

Richard Wong — Mon, 04 May 2009 23:40:24 +0000

Myth 1: The value of my business can be generally determined by using an earnings multiplier of my industry. ie. 3 times EBITDA

This is the most common myth. The earnings multiplier can be useful to get an overall general value based on the industry, but it doesn’t apply to all businesses within the same industry. For example, your neighbourhood grocery store will not have the same earnings multiplier as the Safeway grocery chain. Other factors of value such as supplier influence or technological superiority will also have an impact on the company’s value compared to its peers in its industry. Further, sometimes outside 3rd parties — such as the CRA, IRS, banks, courts, trustees, and other interested parties — will not accept industry multiples to determine value.

Myth 2: Once I have an appraisal done the value will remain constant from year-to-year or period-to-period.

Businesses are not like the Canadian government savings bonds, there is competition, business environment changes, new suppliers come into an industry if it’s profitable enough, some suppliers decide to divest of themselves, some competitors give up on certain product lines, while others join the market because they think they can make more money than some of its competition.

Businesses by their very nature are dynamic, not static and given this their values can easily change from year to year.

Myth 3: Valuation methods and approaches produce an absolute value.

The truth is, if you were to have 5 business valuators value the same business, all 5 will come up with a different value. That is because each analyst may use different methods, approaches, discount rates, risk levels, and other variables to estimating the value. But, if the valuator uses sound valuation methodology and approaches then you can assume the business valuation will be reasonable.

Myth 4: We can have our accountant or lawyer do a valuation.

While these professionals seem like a good resource for assessing the value of your business, they may not be equipped with either the skill, qualifications, or experience to conduct the valuation process properly. Even if they do have proper credentials for valuing your business you may want to reconsider having them perform the valuation. The reason is there is a built in conflict of interest, since they will have an on-going interest in your business after the valuation study is completed, so there is a likelihood the value they derive for your business is biased, either high or low in favor of what you are hoping the outcome will be.

Myth 5: The Financial statements of the company are good enough to determine value.

A company’s financial statements are the basis for a business valuation, but there are many other factors that affect value. Some of these include : the competition, industry, economy, organizational structure, management, its capital assets, where along the business/product life cycle, as well as many other factors can affect the value of a business.

So you can see that in the process of a business valuation there are many factors which can determine the value attached. These business valuation myths don’t use proven methodology, and best practices in determining value. Taking the wrong approach on valuing your business can cost you a lot in terms of time, by prolonging the sale or financing process or money by not having an objective 3rd party opinion which are used to help settle law suits or prevent financing on time and on desirable terms.

Written by Richard Wong, CMA rwong@firstchoicecapital.ca