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2 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Succession – What it is & isn’t
It is It isn’t
• A process • An event
• About family & relationships • person’s problem
• About ownership, management, • Only about taxes
estate and taxes
• About fairness • About equality
• Driven by family values • Driven by accountants
lawyers and insurance
agents concern
• A process to transfer control & • Only about ownership ownership
3 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Common exit strategies
• Passing the business to family members
• Selling the business to partner or employee
• Sale to third parties
• Winding down the business
• Other
4 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Common exit strategies cont’d
• Passing the business to family members
– Identify the successor
– How to deal with inactive members
– Who will control
– What is most tax efficient method
5 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Due diligence
• Shares/Assets
• Be Prepared!!!
• Have information available in the “War Room”
• Ensure information is up to date
6 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Due diligence cont’d
• Annual financial statements (preferably audited)
• Corporate tax returns and assessments
• Interim financials
• Contracts executed and updated
• Banking agreements
• Organization charts
• Lease contracts
• Projections
• Business/marketing plans
• Lawsuits
7 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Due diligence cont’d
• Allow access to CFO/Controller
• A proper due dilly could include an industry analysis
• How are Redundant Assets Dealt With?
8 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Due diligence cont’d
• Assets not needed in the day to day operation of the business – could include excess cash, patents, brands,
– licenses
– Example of a good deal gone real bad
9 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Business valuation
• Did You Know?
– The owners of 56% of Canadian family businesses will retire within 10 years.
– 43% plan to sell their business within 10 years.
– Less than 25% have succession plans in place.
– Less than 30% of family businesses no matter how successful continue into a second generation.
– Only 10% of family businesses survive to a third generation.
10 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Business valuation cont’d
• Who Should Be Interested in Planning Now:
• Individuals who are;
– Considering selling their business or retiring.
– >50 years of age.
– Planning on passing on the business to family members.
– Already have family members in the business.
11 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Business valuation cont’d
• And Should Be Asking Themselves…
– Where is their business going in the next 5/10 years?
– What role will the existing owners be playing in 5/10 years?
– Have they considered starting assembling or have in place an exit strategy team?
12 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Valuation – When is it time to sell?
• Company is in overall good shape.
• Profitability is strong and on an upswing.
• Management team is competent and will stay on.
• Outlook for the business and the sector is attractive.
• Economic conditions are encouraging to buyers.
13 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Valuation – Forms of consideration
• Cash
• Vendor take-back (Note)
• Earn-out
• Stock (common & preferred)
• Non-compete fee
• Management contract
• Consulting agreement
14 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Valuation cont’d
• FMV is:
• Highest price available
• Open and unrestricted market
• Informed, prudent parties
• Arm’s length
• No compulsion to act
• Expressed in cash
15 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Value vs Price
• Value
– What the company is worth
• Price
– The actual amount paid by a purchaser
16 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Valuation – Transaction multiples - private
Private Transactions - Transaction Multiples
9.0 9.2 9.1
11.110.5
10.911.5
10.6
8.08.3 8.2 8.2 8.2 8.4
9.1 9.1
10.2
7.3
8.7
9.5
0
2
4
6
8
10
12
14
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
EBIT EBITDA
17 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
General principles
• Future earnings / cash flows are key
• Using historicals
• Considerations in assessing risk
• Special purchasers
18 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Valuation approaches
• Earnings / cash flow based
• Asset based
• Rules of thumb
• Comparison approach
Is the Company a Going Concern?
19 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Valuation decision tree
I f no , th en use :L iq u id a tio n a pp roa ch
A sset-ba se d a pp roa ch :A d jus te d N et B oo k V a lue
C a p ita lized E a rn in gsC a p ita lize d C ash F lowD isco u n te d C ash F low
O th er
E a rn in gs -b ase d a pp roa ch :
If yes , th en use :
V ia b le (th a t is , a g o in g co n ce rn )?
20 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Valuation approaches cont’d
• Asset based approach:
– Uses balance sheet
– Adjusted book value
– Used for liquidation approach or usually Holdco’s
21 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
COST APPROACH cont’d
• Liquidation approach:
– Establishes a base value
– Assumes an orderly liquidation
– Not a “fire sale”
• Danger points:
– Equipment
– Receivables
– Investments – Pubco
– Private Co.
22 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Earnings based approaches
Earnings / cash flow based approach:
• Capitalization of maintainable future earnings (“CE”)
• Capitalization of maintainable future cash flows (“CCF”), and
• Discounted cash flows (“DCF”)
Earnings based approach:
• Need to consider:
– Projected incomes
– Discounting those projections
– Hindsight – passage of time
23 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Earnings based approaches cont’d
• Value = Present value + redundancies
24 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Earnings based approaches cont’d
Capitalization rates / Multiple:
• Will depend on:
– External factors
– Internal factors
25 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Earnings based approaches cont’d
Capitalization rates / Multiple:
A valuation will usually consider:
– Ten year Government of Canada bonds
– Corporate bond yields – long term
– Prime rate charged by Cdn banks
– Inflation
– Risks
– Private acquisition multipliers
3-6 x EBITDA
26 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Other approaches
Rules of Thumb (“ROT”):
• Caution when using this method
27 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Other approaches cont’d
Comparison Approach:
• Use comparable sales transactions
• Must be comparable
• How many? / Is one good enough? / Who decides?
• Rarely used in Canada
28 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Comparison approach
• Comparison Approach: CAUTION
• Comparable sales transactions must be comparable
• Often used for real estate appraisals
• Multiple comparison?
29 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Goodwill
Goodwill = Value of the business - TAB
• That is:
– The value in excess of the Company’s tangible asset backing.
– Represents the intangible value of the business
30 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Goodwill cont’d
There are two types of goodwill:
(1) Personal goodwill
• Attaches to proprietor of the business
• Cannot be sold or transferred
• Therefore, has no commercial value
31 CCIM - Maximize your business value © Deloitte & Touche LLP and affiliated entities.
Goodwill cont’d
(2) Commercial goodwill
• Attaches to the business
• Has value and can be transferred
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