The recent Capital Conference, hosted by the Association for Corporate Growth, served up some useful thoughts for those who might be in business acquisition mode:

----From Ray Kong, Senior VP, Ipsos Reid (market research) re. buying in Canada,

• Skate to where the puck is going, not where it is (investing is like hockey?). In today’s volatile and exponentially changing environment, it’s always too late to invest in today’s big winners. Spend time and effort analyzing trends to know what will be big and take the risk that you are right.
• Demographics explain a lot. For example: 
  • 53 % of the population are women
  • 25 % (of the population)are single women
  • By 2015 seniors will outnumber children
  • Social media are now credible information sources
  • Four societal forces to keep in mind:   
    • Individualism is expanding (try customizing sports footwear on-line)                                                                                                                                      
    • Ephemerality (as in temporary possession) is the new owning.  E.g. Zipcar is expanding
    • Debt is growing in the 65-80 age category. A new market.
    • Worry amongst young people is chronic. Relieve their pain in your marketing.

----From Steve Hudson (remember Newcourt Credit and its demise?), he’s back, leasing and acquiring,

• All key players have to have their own skin in the game. Keeps them honest
• On compensation, position base pay at 75 % of market and performance pay to reach 150 % of market
• Flatten the organization. Key market information changes too much going up the ladder. Top executives need to spend 30 % of their time with customers.
• Sell once, profit twice. Add new product or service offerings to existing customers to leverage the selling efforts.
• Acquire with care. Must pass the sniff test before the analysis. Double the time estimate to achieve synergies, half the cost reductions assumed…..you get the picture, be a wary acquirer.

------ From the blue chip investment banker panel, there is more money available than quality deals right now. This should last up to 18 months as they see it. Sellers are taking lower multiples than the norm, hence it’s a good time to be a buyer. 

John Bielby

Most succession plans and strategies deal with selling a business and investing the proceeds to live well through retirement.  Not much or any real thought is given to what the business owner wants to or can do with her or his time, post exit. Maybe a “bucket list” exists or the few non work activities developed over their career are still of interest.  These won’t fill the life of what has been to-date an entrepreneur mostly consumed with work. The business owners I have known all lived their work, initially out of necessity and then from habit. They literally took their identity from this business that they created, nurtured and needed to sustain their desire to build a thriving enterprise.

And then I am seeing more “young” business owners who sense it’s time to get at some of the other important undone adventures of life. As Rick George is quoted in this past weekend Globe and Mail (he has just at 62, stepped down as CEO of Suncor)``Suncor, after swallowing Petrocan, had started to become that kind of place (referring to huge Exxon Mobil Corp.) where procedures began to rule over personal initiative. The fun was gone.  According to the article he has a full post succession agenda.

One business owner commented to me that he imagined himself sitting on a plane and, upon being asked by someone what he did, having to say that he spent his time fixing up old cars. Which he does quite well in fact however he didn`t see it as his identity. He`s still running his business by the way.

So each business owner needs to spend some quality time addressing the question, ``and what now my friend?”

If a return to skiing is contemplated maybe getting into the gym with a trainer will be needed.

If the urge to “give back” is present, the way in which the proceeds from the sale of the business are invested may have to be structured to enable philanthropic gifting.

Whatever the plan, understand that going from being an owner, with important, time critical business to do, to an idle, perhaps wealthy but none-the-less idle, individual, is not healthy or after a short rest, life fulfilling.

Like the more tangible parts of the succession plan, the post succession bit needs some critical thinking and will always benefit from inputs from those close to you.  Then you will be able to say, as Mr. George does, “Life’s been full actually. I haven’t been resting on my laurels at all. And I’m quite excited about what we’re doing next”.

John Bielby

Almost all enterprises undergoing a change of ownership use a formal business valuation at some point in the process.

What are the uses for that valuation?

Firstly although a starting point in a negotiation to sell a business, the valuation is rarely the price at which ownership changes hands. Price is driven by any number of other variables including but not limited to, special synergistic value for the purchaser, potential distressed selling circumstances affecting the current owner, methods of financing the sale/purchase, and numerous others.

Generally the business valuation may determine the “fair market value” for which in Canada, an accepted definition (per the CICBV) is “ the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market, between informed and prudent parties acting at arm’s length and under no compulsion to transact”. That is a mouthful and needs careful breakout into its constituent parts.  We can come back to that in another blog however its usage is often in the following  circumstances:

-        To develop a price in a non-arm’s length transaction where the business will never be exposed to an open market

-        To allow tax matters to be properly dealt with from the tax authority’s perspective

-        To support applications for financing at various financial institutes

Suffice to say that valuation is not solely an exercise in mathematics but requires the use of an accredited valuation expert such as a Chartered Business Valuator who will bring experience, informed judgment and adherence to standards for business valuation. Clearly it is never a one-size-fits-all process even for businesses in the same industry. A comprehensive valuation report will expose value not always appreciated by owners and also point to business weakness allowing correction by the current owner before hitting the market.

So if you are about to sell your business in any fashion, expect to seek out and use a formal business valuation preferably at the start of the process to avoid costly mistakes later.

John Bielby

Consider these side-by-side…..Canada’s loss of mid-sized companies (527 gone between 2007 and 2010); the phenomenon of “reshoring” in which major manufacturers are bringing their business back from the likes of Japan to Georgia and Kansas; and the debate regarding financial support to Ford to re-tool its Oakville plant for new vehicle production in 2014 (and add in the angst over the impending line shutdown at GM Oshawa and loss of jobs).

The BDC can study this to death as per their views in Saturday’s Globe & Mail. By the time they announce a conclusion and any government level responds, the possible gains from the” reshoring” decade will be safely found in Indiana, Tennessee and Georgia.

Canadians have to be prepared to work for lower wages in the private sector, unionized or not, and government instead of just reducing headcount in the public sector, has to reduce real compensation so that we don’t end up with a two tier society (we already have it in pensions between the two sectors). We still have an educated workforce, space and structure to support these “reshoring” projects. It’s a sense of the real world that exists in a global market for manufacturing that’s needed. There’s a need to have a short, open debate about the aforementioned hollowing out of our business sector and the consequent reduced economic capability to supply a standard of living the starting point. Candid business, union (public sector and private) and political leadership will be absolutely necessary if a new consensus is to be constructed. All the protesting in the world (see Greece and Spain) doesn’t change problems of high unemployment. The state governments in the USA have taken a view that jobs are necessary and they and their citizens are embracing the manufacturing jobs that are re-appearing. Let the market set the wages. Forget the posturing. It’s what has to be done now to recreate the more prosperous future we want for our children and their children. 

John Bielby

We all support substituting sustainable electricity sources for fossil fired fuel power plants. It makes sense for our children’s future. We chew the air in the GTA, you cannot really breathe it.

A recent article in the Globe & Mail (Gwyn Morgan, April 30^th , admittedly an energy patch guy) cites the numerous, expensive government policy initiatives in Europe and North America which have been scaled back or dropped due to ineffective results. Note this is about results, not the substitution notion. Whether in Spain or Germany, the USA or Ontario; grants, feed-in-tariffs, local content rules and other subsidies all have failed as yet to significantly drive more sustained rates of substitution, more permanent jobs and almost certainly ensured higher costs of electricity for both residential and business users.

Did governments try too hard to drive jobs as well as get their green merit badge, all at the same time, only to distort an important technology shift and perhaps in fact slow the uptake in sustainable electricity resources?  If we’re to convert to electrically powered vehicles to drastically reduce dependence on the internal combustion engine (and get back to breathable air) the price of electricity has to make that conversion feasible. We are market driven animals after all.  And we still demand the conversion to sustainable  energy sources in North America and abroad. It can be done with intelligent government policy not bandwagon thinking in developed and developing jurisdictions. As it’s a long term conversion project, the policies and programs have to make sense through periods of both economic adversity and prosperity in order to allow continuity of planning.  Not easy but doable.

John Bielby

This major innovation support program for small and medium (SME) businesses,  appears to be on a soon-to-be-gone watch.  In fact, the CRA agency which administers it has been cutting its pay-outs with vigour since 2010. While the new( in 2011) Director General, Susan Betts, has stated that it’s being tightened up, in fact the intent is clearly to reduce the cost of the program and especially target overly ambitious support submissions from which an industry of consultants has taken significant income in the past.  Clearly the notion that 20 -30 % of the payout sums would end up in the hands of the consultants who help companies access the program by preparing the lengthy submissions is a flaw in the use of these funds.

Yet some of the recent recommendations of the Jenkins Report dealing with revising the overall federal approach to innovation support should be of concern. For example, a centralized funding agency to direct the government spending for innovation, essentially picking winners and losers, or worse, being politically influenced is worrisome.

Another recommendation, to link government procurement with supporting innovation, while sounding wholesome, has the potential to have procurement of items in government spending based upon degrees of innovation claimed rather the value for each dollar spent.  Yet the notion of assisting high-growth, innovation firms access risk capital in later stages of early growth where there are gaps now, could be of real benefit.

It’s a difficult path to chose from for the federal government and the Minister for State for Science and Technology, Gary Goodyear has indicted that it will be chosen before 2012 is over.  Let’s trust there will still be some realistic program left for companies responsibly accessing SR & ED now, even if they aren’t the next RIM.

John Bielby