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

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

Part 2:  Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview

As a large part of the life sciences group in BC Simon Pimstone met with Liberal leader Michael Ignatieff on life sciences and explained the issues of funding, and you would think that it would fit in with Ignatieff’s desire to build a larger knowledge based economy and a louder opposition to the Canadian federal government’s budget would have sent that message on behalf of the life sciences community that it does have greater support, especially in the downgrade in future funding in this area.

The Canadian TV & film industry according to industry reports employed 126,900 FTE’s (full time equivalents) and the value of production was $5 billion in the 2006/2007 years.  This compares to the Life Sciences industry in Canada which produced sales of $1.9 billion but the tax breaks are not equal with the Canadian federal government and provincial government film and TV tax credits allowing up to 53.5% of BC labour expenditures on a yearly basis.

BC universities produce between 3,000 to 4,000 science graduates of which many do not find employment in Canada, yet all the life sciences is asking for is a fair share of funding to continue to find cures for different diseases that helps all Canadians and the world.    The public cost of educating students who end up working in another country is approximately $48 million (3,000 students * $40,000 expected cost of education * 40% funding from governments, estimated) .  This a huge cost only for a single province, not the entire country where the Canadian people are funding scientists to work in other countries at the end of the day.

What’s important is not providing funding on an ad hoc basis but continued basis even if its smaller amounts to foster an environment of innovation and then onto commercialization opportunities through Genome Canada, CIHR (Canadian Institutional  Health Research) and tax incentives.

Our health system is arguably one of the best in the world, some say the United States, but only if you’re willing to pay $2,000 per month.

SRED is a good funding tool starting from 1995, but really now inadequate for Canada’s life sciences sector as drug development takes much more time and money in order to recoup research funding.  It is only good for Canadian controlled private corporations, (CCPC’s) which many are not anymore because they’re too large and Aspreva Pharmaceuticals & Biovail Pharmaceuticals are some of the few companies which have profits in order to recoup some of these research that takes several years to make create a single drug.  A cap limit on SRED would even be more palatable to the sector ie. $100 million if they took off the CCPC eligibility requirement and the threshold are too low with barely any increases  since 1995.

Even if tax incentives, to entice offices in Canada such as providing tax holidays for bringing in new manufacturing facilities where they employ 200 people which are paying income tax now where they don’t pay personal income tax for the first 2 years with a commitment for 5 years residency then people would be paying taxes and spending that income in the country and province.

Allow investments earned from life science investments in 2009 and 2010 to be exempt from capital gains tax but was ignored by the federal government in the budget.   Use some of the carry forward losses that life science companies have accrued and provide a formula where say 1/2 of all carry forwards are eligible ie. 40 million and provide a cash reimbursement for 25% of the 1/2 which would result in needed funding to continue doing research to reaching the milestones.

The facts are that SRED was really designed for large company models, large drug companies, large aerospace companies, not really the Canadian life sciences sector which the majority are small companies from 5 to 150 people.  The inadequacy of updating the Canadian Scientific Research & Exploration Development tax credit system is costing the Canadian economy jobs in the short and long term, but more importantly the potential cures to the various diseases and cancers out in the world.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

Part 1:  Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview

Canadian government’s announcement on reduction of future funding for Genome Canada affects life sciences companies in British Columbia, including larger start ups such as Xenon Pharmaceuticals.

Affects of this including having fewer jobs and hindering the ability of companies to commercialize their intellectual property they have created in Canada because of the cost to do this, hence the need for Canadian life sciences companies needing to partner up with large American and European pharmaceutical companies in order to get these discoveries to market.

For start-up companies Genome Canada has provided bio-tech companies with the ability to do research and keep our science graduates from our universities to bolt to the United States & Europe with the so called brain drain.

A current Xenon Genome BC project has 10 to 15 scientists working on the project currently, which if Genome Canada funding wasn’t available, these high paying jobs would not exist in British Columbia.

Because Canada has such a tiny venture capital pool for life sciences,  life sciences funding is largely dependent on foreign venture capital funding as the primary source of funding as well as Canadian federal and provincial funding.

While in the United States the National Health Institute (NIH) funding will be increasing by $3 billion announced by President Obama whereas the funding from the Canadian government has decreased.  The government is doing exactly the opposite and sending a statement on the importance or lack of it on science and technology in British Columbia.

President Obama has announced already funding for green energy grids, health and innovation, whereas in Canada we are still focused on the old school infrastructure is an opinion in the life sciences community.

Simon Pimstone commented that if you’re putting money into infrastructure which will build a knowledge based economy, such as technology parks for Pharma companies.  Companies like GlaxoSmithKline or Johnson & Johnson will be enticed to build manufacturing vaccine facilities which provides high paying opportunities for science students for years to come.

Continued in Part 2 of Interview with President & CEO Simon Pimstone

Polaroid known as a maker of instant cameras and film was finally auctioned off for $59.1 million in a bankrupty protection.  This famous company had come upon hard times, but it’s interesting to note that the price tag was for the intellectual property, company, and digital and hard film collection.

Question is that does Patriarch think the company’s digital assets are worth more than the Polaroid name?  When you’ve had companies such a Sony, Hewlett Packard, and a host of camera phone makers enter in the space along with Polaroid and Kodak you would think that the Patriarch the private equity firm known for its reputation as a turn around artist it would try to leverage more of its digital assets than the previous management of Polaroid.

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

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