Presentations and published articles
March 2021: Presentation to ESOP Canada Annual Conference 2021 https://youtu.be/0Amg5nVJNVI
June 2018: A guide to understanding business valuator’s reports – now produced in a series of articles under 6 categories. Find them on most pages of this website.
April 2017: Credibility in valuation reports
April 2015: Presentation for Lets talk money, Saskatoon
Chartered Professional Accountant
A member of the Canadian Institute of Chartered Professional Accountants (an institute formed in 2013 on the merger of the Canadian institutes of Chartered Accountants, Certified Management Accountants and Certified General Accountants). CPA’s are currently required to disclose their legacy designations, i.e. CPA, CA, CPA, CMA or CPA, CGA. In the United States the designation CPA stands for Certified Public Accountant. An Canadian accountant with both a Canadian and a US designation would disclose this as (for example) CPA, CA; CPA (Illinois).
Chartered Business Valuator
A member of the Canadian Institute of Chartered Business Valuators – entrance requirements include post graduate study over two years in four core modules in valuations, tax and law, two elective modules, 1,500 hours of supervised training and successful completion of the Membership Entrance Exam (MEE).
A term that is used in a variety of ways all related to the financing of business. Some uses are as specific as arranging debt and equity for corporate clients; some uses refer more generally to business planning and cash flow forecasting.
The promise of a dollar to be received in a year’s time is worth less than a dollar in hand today. The difference is a function of the discount rate. For example, $10 to be received a year from now, discounted at 10%, is worth only $9.09 now ($10 / (1 + 0.1)).
The term applied to all the work done in assessing a proposed deal; it is done prior to concluding a deal, sometimes after a conditional acceptance of the deal.
Most businesses are funded from 2 principal sources: (a) equity capital provided by or accumulated for the benefit of owners and (b) loan capital, usually long term (more than one year). Enterprise value is the value of the whole business, before splitting into value based on loan capital and value based on equity capital. See also Equity value.
See also Enterprise value. Equity is the share capital provided by the owners of the company plus retained earnings. Equity value is found by deducting the value of term loans from the value of the enterprise.
ESOP (Employee share ownership plan)
An ESOP is a mechanism for a business owner to share the ownership of his/her business with one or more employees. It can involve simple equity, stock options or “phantom” shares (a mechanism whereby employees share some or all of the benefits of ownership without actually taking up shares).
Fair Market Value (FMV)
Usually defined as “the highest price available in an open and unrestricted market, between informed and prudent parties, acting at arm’s length and under no compulsion to act. Fair market value is expressed in terms of cash or money’s worth”.
FMV vs Price
FMV is a notional concept and its calculation does not involve exposing the business to the market for sale. FMV is not the same as price. The price at which the shares in a business may ultimately be sold is influenced by many factors, such as unique negotiating positions and settlement terms, which are not necessarily taken into account in determining FMV. However FMV provides an objective yard stick in the negotiating process.
Goodwill is an intangible component of the value of a business that is based on earnings for the whole business that exceed the aggregate of earnings that could be expected on individual asset classes. Goodwill is calculated by capitalizing earnings or cashflow and deducting the value of net assets used in the business, measured at fair market value. Goodwill may be identifiable. Some goodwill may be too closely associated with one of the owners to be transferable, in which case it will be excluded from the value of the business.
A term used in a variety of ways. Typically it refers to the fee based professional management of “other people’s money”, which the managers may choose to invest in publicly traded stocks, private company equity, debt, bonds, real estate, mortgages, funds, derivative instruments, commodities, etc; the managers usually work in a regulated financial institution.
Leveraged buyout (LBO)
Refers to the purchase of a business using borrowed money. An LBO is usually led by outsiders, who borrow against the security of the assets of the business that they are buying.
An acronym used by investment professionals to mean Mergers and Acquisitions. It normally refers to buying and selling businesses but the service will involve considerable advisory work as well as marketing the business for sale.
Management buyout (MBO)
Refers to the process whereby the managers in a business buy all the equity in the business. Usually managers will need to get a loan to fund the purchase. Often the vendor will take payment in stages, effectively lending to the new owners by means of a vendor take back (VTB) loan, which allows the vendor to take back ownership if the new owners fail to pay back the loan.
Refers to the dollar amount at which a transaction occurs. For a comparison to value, see Fair Market Value (FMV) and FMV vs Price.
Investors’ money placed in an unlisted company. Private Equity is often structured through a trust, limited partnership or fund. Private Equity is usually managed by professional managers who may or may not have a share in the fund.
Redundant assets is a technical term used by valuators that describes those assets that the business does not require to generate the expected level of business. These assets could be withdrawn without impacting the profitability of the business or the value of the enterprise. Redundant assets usually take the form of excess cash, receivables or inventory but can also include such items as related party advances, investments in marketable securities and real estate. When the value of the enterprise is calculated using a multiple of earnings or capitalization of cash flows method, redundant assets are added to the value so calculated in order to establish the total business value. Unused borrowing capacity may be considered a latent redundant asset on the basis that funds could be drawn on the borrowing facility and paid out as a dividend without impacting normal business operations. Redundant assets are usually estimated by comparing an “ideal” level of assets for the business to the actual assets at the valuation date. Some flexibility is adopted when estimating the level of redundant assets given the seasonality of asset levels and the fact that an “ideal” level can be academic.
The resources of a business include its cash, receivables, equipment, buildings, inventory, raw materials and its people. For a business to function efficiently, it is important that resources are in balance and consistent with the objectives of the business. It is also important that the people are employed in roles that are suitable to their skills.
This is a term that usually refers to reorganizing the contractual obligations of a business that is failing. For example, lenders may be required to convert their loans to equity and relinquish their security to allow a new lender to advance new funds to the business.
Strategic planning vs. business planning
A strategic plan focuses on only the key elements of a business: categories of products, markets, financing sources. It changes only when the business changes its future focus. A business plan is significantly more detailed and should cover every aspect of the business. A business plan should be a living document that changes regularly, usually once a year, when changes in historical performance indicate that future performance may change as well.
In a business context, business succession refers to a change in ownership or management and, very often, both. Planning for succession is critical if the changes are to be effective.
An acronym that stands for Strengths, Weaknesses, Opportunities and Threats. An analysis of these factors is a good way to start an evaluation of a business.
Tangible asset backing
The tangible asset backing (TAB) of an enterprise is comprised of all the operational assets of the business, at their fair market value, less the value of all operational liabilities (usually short-term). It allows the valuator to calculate the value of the goodwill in the enterprise by deducting the TAB from the enterprise value.
Two types of tax shield are usually calculated as part of the valuation of a company:
(a) Amortizing capital assets for tax purposes provides a business with tax reductions for as long as the “capital cost allowances” are claimed. The present value of such future tax benefits, referred to as a tax shield, provides additional value to a business that, if material, is added to the fair market value of the enterprise.
(b) The value of the tangible asset backing in a business may be impacted by the fact that there is usually a difference between (a) the “undepreciated capital cost” (tax value or UCC) of the capital assets, trapped within the legal entity of the tax paying company and (b) the FMV of the capital assets which, if they could be moved to a new tax paying entity, could provide a new “cost” of those assets on which different capital cost allowances could be claimed. The difference between the tax shield (i.e. present value of future capital cost allowances) based on the UCC of the assets and the tax shield based on the FMV of the same assets is referred to as a tax shield or tax shield lost when calculating the tangible asset backing of the enterprise.
A fancy sounding word that really just means change. It is usually applied to a change of ownership but it could equally apply to any form of change from a start-up to growth to maturity to decline.
Vendor take back (VTB)
A loan from a vendor to the buyer of the business that helps the buyer finance the purchase but gives the vendor the ability to “take back” the business if the buyer fails to service the loan.
A term that summarises a business’ net short term access to liquid assets – cash, receivables, prepayments, inventory, and short-term investments less trade payables and other liabilities due within one year.