Planning ahead key to getting top value when selling

Written by: KATE ROBERTSON

Special to Globe and Mail Update

Published Friday, Dec. 03, 2010 9:19AM EST

As with every exit strategy, experts advise owners to plan early if they think they will eventually sell their business.

According to the business monitor survey published for the first quarter of this year by the Canadian Institute of Chartered Accountants and Royal Bank of Canada, the top two challenges business owners believe they will face in selling are getting the right value for their company and finding the right successor.

Lawrence Wilder, a corporate lawyer with Cassels Brock, said that companies can get a start long before the actual sale date by staying on top of financial reporting and other bits of housekeeping.

“You certainly will get a better value if you have your ducks in a row than if you don't,” Mr. Wilder said.

Business owners who already have comprehensive financial and tax reports completed by third-party advisers will have a leg up on the due diligence process that eventually comes in an acquisition.

Once a business owner has decided to sell, he or she will have to hire an auditor, legal counsel, a business valuator (who does not take a commission on a sale) and, sometimes, a mergers and acquisition adviser (who does take a commission).

The team completes a company review, Mr. Wilder said. Everything from sales projections to employee and intellectual property agreements inform both the sales memorandum document that is used to market the company and the valuation of the business.

Some work with a business broker to market the company, but many owners want to maintain confidentiality during the process. Often, they rely on their adviser's networks to look for potential buyers.

“Most accounting firms have divisions that will assist in finding a buyer,” Mr. Wilder said. “They'll quietly market it around the street, and, very often, they won't name the company. They'll just say it has approximately x…revenues, and to please contact the accounting firm to get the name of the person who's selling.”

Interested buyers can then begin to negotiate the terms of the sale agreement to see if a deal can be made.

Even though the economy will have an effect on M&A activity, there are key factors every business owner should consider to maximize value when they sell, said Farley Cohen, a certified business valuator.

For one, it's important to have developed a business plan that goes beyond the owner's final day. said Mr. Cohen, chair of the board of the Canadian Institute of Chartered Business Valuators and a principal with Cohen, Hamilton, Steger & Co.

“The key thing to keep in mind is that value is prospective,” Mr. Cohen said. “It's looking into the future.”

Along with having comprehensive tax returns and financial statements that put the company in good standing, business owners must have answers for questions about how the company will continue to grow.

What assets and liabilities does the company have today and what are its prospects for the future? What is the value of the real estate and the equipment? How are sales expected to grow? Are there any unusual expenditures coming up?

Secondly, a business valuator will measure the internal risks of the company, which include how it is structured, how it is operated and by whom.

Whether or not a management team has a chief financial officer and a vice-president of sales and marketing will affect how much value he or she can ascribe to the company.

The valuator will also look at how competitive a business's pricing is, the level of customer satisfaction and a company's awareness of its competitors.

“You have to know what's going on in your industry and act accordingly,” Mr. Cohen said. “If there's new machinery that everybody's using, you should have that. I don't want to buy last year's way of doing things. I want to buy this year's – or, even better, next year's.”

Lastly, Mr. Cohen will look at the external risks to the business, which are largely outside of most owners’ control. But any owner would be wise to ask himself or herself the same questions a business valuator will be asking.

“It's sort of like a house,” Mr. Cohen said. “When you're selling your house, you'll look to find out what your neighbour sold their house for.”

Special to The Globe and Mail

Housing bubble threatens in six cities: Report

By STEFANIA MORETTI, QMI Agency

Last Updated: August 31, 2010 12:21pm

A perfect storm has created a housing bubble in Canada that could lead to a drop in property value of nearly 40% in some markets, according to a report by the Canadian Centre for Policy Alternatives.

For the first time in 30 years, house price increases have climbed faster than historic comfort levels in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa, the think-tank said.

In the past, inflation-adjusted home price in these “red-hot” markets have held steady at between $150,000 and $220,000 in today’s dollar. But current average price tags in all six cities are now and well over $300,000.

"The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen," said the report's author, David Macdonald, in a release Tuesday.

Benjamin Tal, a senior economist and real estate expert at CIBC World Markets, said he wouldn’t use the word “bubble” to describe the present situation but did say prices are definitely “overshooting” and will go down.

But Canada’s big six markets are less stable than a generation ago, especially after the steep price increases between 2002-07, the report said.

Ten years ago, prices tended to hover around three to four times the provincial annual median income. Today, prices are pushing anywhere between 4.7 to 11.3 times annual median income.

As prices rise, mortgage holders are more and more vulnerable to rate changes, Macdonald said. As interest rates come off near-zero levels, variable rate holders may struggle to make rising monthly payments.

“Rate-setters at the big banks are in the driver's seat now as mortgage rates inch up. They need to hit the brakes lightly."

Either way, Canada’s real estate markets could be in for a correction at best or, at worst, a bubble burst, Macdonald said.

Using the 2006 housing market collapse in the U.S. as a model and simulating current market conditions, the Centre for Policy Alternatives predicts homeowners in Edmonton and Montreal could be hardest hit, losing 38% to 34% of their property value respectively in less than three years, in a worst-case scenario.

In terms of dollar value, Vancouverites would be worst hit and stand to lose nearly $200,000 on the average home.

“I really don’t see what would trigger this kind of sharp decline,” Tal said.

His forecasts are far less grim because as he sees it, the market fundamentals are still strong. Tal sees price drops to the tune of 10% on average and by 15% only in select cities.

“I’m not in this camp that sees disaster happening,” Tal said.

Canada has seen three housing bubbles burst, twice in Vancouver and once in Toronto, the report said.