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

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

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

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