Knowing the Value of Your Business

All too often, business owners will plan their retirement and estate based on their own personal valuation of their business. After all, could there be anyone more qualified than the owner to truly know how much the business is worth? The answer, surprisingly, is a resounding yes. According to experts, a business owner's self appraisal and evaluation of his company will generally be well off the mark on the high side. Business owners will allow their emotional and personal attachments to the business override their objective opinions, thus producing end results that may be quite inaccurate.

The best course of action is to retain a professional valuator. The valuator – generally an accountant – will work the numbers and forecast accurately. Objectivity is essential. The owner will look at where he has been and what he has accomplished. The valuator can take all the facts and figures and see where the business will be. For example, a valuator may conclude that the business is the life's work of an individual and the owner is the company. Remove him from the picture and the value of the company will plummet. This is often the case with small businesses. On the other hand, a larger business with multiple shareholders may have developed a succession plan. In this instance, the valuator will clearly see that a working plan is in order to allow the business to continue, even after the owner is no longer in the picture.

It is important to note, though, that business valuation is an art, not a science. Two valuators can arrive at different conclusions for the same business. The reason is that the valuator must make future predictions based on the present numbers. There is always a possible margin of error.

Be that as it may, a professional business valuation is an excellent tool to help business owners assess their company's worth with no emotional strings attached.

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Beyond the Southern Border

Historically, the United States has been Canada's dominant trade partner. With its relatively limited domestic market and vast resources, Canada has been quite dependent on exports to the U.S. However, the global economic recession has changed this reality, at least for the interim.

In fiscal year 2000, approximately 87 percent of all Canadian exports were to the U.S. Recent figures show a drop to almost 71 percent.

Politicians have long advocated diversification of trade relations as insurance against a serious drop in trade with the U.S. Now that reality has dictated a change, many Canadian companies are experiencing a drastic rise in income largely due to overseas trade partners that previously had not been considered.

While Canadians hope for a resuscitation of the U.S. economy, as export costs to the U.S. are far less than distant foreign addresses, the amount of trade with countries in Africa, the Middle East, and Asia has provided economic recovery for many Canadian businesses.

Canadian Prime Minister Stephen Harper has targeted the Chinese market as a partner for Canadian trade and will pursue the issue on an official visit to China later this year. In addition, his government is presently negotiating a trade deal with the European Union.

Most economists agree that the U.S. economy will rebound from the current recession, albeit not as quickly as Americans would like. In the interim, the Canadian economy is moving forward and has found new addresses to further trade. Having discovered these new lucrative markets, it is unlikely that Canadians will return to the high level of dependence on trade with the U.S. The global economy is maturing and Canadian resources are playing a vital role in this process.

Swim Before You Sink

The downturn in the economy has created "economic collateral damage." Small and medium-sized businesses have been forced into bankruptcy due to the credit problems of their customers, even though their businesses were solid.

Insolvencies in Canada rose 20% from January 2008 to January 2009. As such, many companies are currently at risk.

Experts state that even the best run businesses, with exemplary credit practices, cannot ignore what is happening around them. This is the time for companies to stop being "Mr. Nice Guy" and tighten credit policies with customers.

A common problem is that many business owners have signed personal guarantees to their banks in order to receive company loans. As they begin experiencing problems, they order large amounts of unpaid inventory and leave it for the bank to sell in lieu of repaying loans. The supplier is often the big loser.

Business owners should consider tightening the credit lines with their customers. Don't get caught with over-extended credit to a customer, even those that have been loyal for years. Circumstances may change that long standing relationship.

Credit checks should be conducted periodically. It may be wise to start using written contracts, rather than the informal handshakes of days gone by. If necessary, one should get indemnities or personal guarantees from customers. Essentially, a small pr medium-sized business wants to avoid being an unsecured creditor, should the customer close its doors. "Be prepared" is the credo of modern business credit practices.

One should also diversify, both in suppliers and customers. Being dependent on one primary supplier or customer can be extremely risky. Try to keep one step ahead of the game and put your own business interests first. Keeping one eye open at all times can prevent disaster.

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Small Caps Lead the Way

Is the global recession behind us? There are as many answers as there are doubts. But, Canadian investors seem to be optimistic about economic recovery, and are displaying their optimism through investments that may be considered slightly risky in uncertain times.

Canadian investment dollars have been flowing into small cap companies. Small cap refers to stocks with lower market capitalization. Small cap companies, (the average capitalization being around C$370 million), took a severe beating in the recession. When the financial world did not come to an end, these stocks bounced back more than others, due to their severe drop.

Lower prices have certainly attracted investors to the small caps. However, true believers in global economic recovery have been willing to take on the larger risk of these stocks, believing that the risk will produce a handsome profit.

This is not to say that all small caps are attractive to investors. The wise investor still must pick carefully. Investment analysts state that small caps in energy, materials, and consumer discretionary sectors are proving to be the most attractive. In fact, energy and materials comprise roughly half the weighting of sectors in the BMO Small Cap Index. The index monitors and rates a portfolio of around 400 companies valued at nearly C$150 billion.

The future is still uncertain. However, investors seem to indicate that there is reason for hope. Several months ago, many economists and investors feared that global economic collapse was on the horizon. Based, though, on recent investment activity, many are beginning to see rays of sunshine on that same horizon.

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Deferring Tax to the Next Generation

No doubt many independent business owners have seen their company's worth decline in the last year. However, chances are very good that the value will rise again. If the company owner thinks that the rise will be substantial over the next few years, there is a wonderful opportunity to take advantage of a unique tax savings and defer the capital gains tax on the projected growth to the next generation.

The method is known as an "estate freeze." Essentially, the "freeze” caps the share price of the owner. Any future growth in the share price is passed on to the next generation of shareholders.

The method is as follows: the owner of the business gives his common shares to the company and takes back an equal amount of preferred shares. These preferred shares can issue dividends to the owner, thus allowing him livable income. Meanwhile, the common shares are issued at nominal value to the future owners, whether it may be family members, employees, etc. From that point forward, growth in the company is accrued to the new shareholders. Should the owner die, calculation of the capital gains tax is based on the value at the time of the freeze, not the accrued, increased value. This can provide a substantial savings on capital gains. Numerous companies have become financially strapped having to pay large capital gains taxes. The estate freeze can greatly reduce that tax bite.

Some companies have already done "re-freeze" while others have added trusts that name beneficiaries who will own the common shares in the future. All these moves are intended to reduce capital gains taxes, now and in the future, as much as possible.

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New Brunswick's Less Optimistic Tax Savings

Much fanfare accompanied the New Brunswick government's tax cuts that took effect July 1 of this year. After the dust settled, it appears that less money is returning to the province's residents than was originally advertised.

Premier Shawn Graham promised a "pleasant surprise" to residents on their pay stubs beginning in July. While there have been some changes for the better, they are far below what the premier promised. According to leading tax analysts, the tax cuts are as much as 25 per cent less than promised.

While the tax cuts will verify based on individual income, many residents have said that the net difference is so negligible as to not have any effect on their habits.

The provincial Department of Finance does admit that the figures quoted by the premier included a reduction from an old Progressive Conservative government tax break that takes effect every January 1, beginning back in 2001.

The current government's 2009 budget included numerous budget cuts to various departments and a two year wage freeze for public sector employees. As both these items were unpopular, though necessary in order to tackle a large provincial budget deficit, it was hoped that the tax break would soften the blow. The budget included the first part of an economic stimulus package by adjusting both personal and corporate tax rates. By 2012, the province will have two personal income tax brackets. The maximum tax will be 12 per cent. In the meantime, residents feel that they have not been adequately compensated for the budget cuts.

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The Pick of Professionals

While some companies coast-to-coast have been downsizing as a reaction to the slump in the national, and ultimately global, economy, others have found that this is the ideal time to recruit professionals at senior and executive levels. In essence, some companies have realized that this is the time to turn the economic downturn to their advantage.

A large number of highly qualified people are ready and able to work. Through no fault of their own, they have been laid off, as companies have had to make extremely hard decisions in order to maintain a balanced budget in challenging financial times. The result is a deficit in cash but a surplus in talent. Thus, CEO's with a sharp eye are using this opportunity to shop for top talent that can ultimately add to their corporate team.

Not only are recently dismissed professionals available to work. Companies are unabashedly recruiting top talent from the active workforce, seizing the opportunity to woo top-tier professionals to their management teams. In this new era where job security is rapidly becoming near extinct, top executives are open to offers.

As Canada is rapidly emerging from the recession, companies with an eye to the future are adding talent to their teams in order to strengthen their corporate positions. An impressive list of available talent is ready and able. Similarly, not only has active recruiting become the order of the day. Whereas companies had difficulty soliciting top level resumes as little as two years ago, today those same companies are able to take their pick of qualified applicants. Similarly, the wide variety of available talent has afforded companies the opportunity to add new skills to their management teams.

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HST Coming to BC

British Columbia Premier Gordon Campbell has announced that his province will be introducing the Harmonized Tax (HST). The province will harmonize its provincial sales tax (PST) with the federal GST creating a single 12 per cent sales tax. The new tax is scheduled to come into effect July 1, 2010.

B.C.'s HST will be the lowest in Canada, noted provincial Finance Minister Colin Hansen. The province does admit, though, that the new tax will increase the cost of some services in the short term, as these were previously exempt from the PST. However, government leaders explain that the new HST will boost investment and ultimately cut costs.

Addressing the possible rise in prices, Mr. Hansen explained that the PST is often embedded in the price of goods, such that the consumer does not see it at the register. He feels that the cost savings for businesses, resulting from the new tax, should be passed on to consumers. Provincial leaders estimate that over $2 billion in costs will be removed from B.C. businesses.

Similar to the PST, the new tax will also include exemptions. The HST will not be applied to gas and diesel fuels, children's car seats, children's shoes and clothing, diapers and feminine hygiene products. The exemptions will come as point-of-sale rebates. In addition, there will be a partial rebate of the provincial portion of the HST on houses up to $400,000. These houses will bear no more tax than under the current PST and houses above this amount will benefit from a flat rebate of approximately $20,000.

The federal government has pledged $1.6 billion in transitional funding as well as paying for the full cost of administration, thus generating an additional $30 million in savings annually to the province.

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Franchise – The Final Frontier

For a large number of mid- and senior-level business managers and executives, the current recession has brought something they didn't readily envision – layoffs and unemployment. Job security is no longer a given benefit at their corporate level. The former wealth creation strategies – registered retirement savings plans, pensions, real estate, stock portfolios – have ceased to become guaranteed. Age discrimination, now known by the politically correct term "over-qualified", is a key player in the corporate world.

This new trend does not seem to be a short term solution to the current recession but, rather, a change in employment attitudes and management strategies. As a result, experienced executives have also changed their attitudes. They have come to the realization that the time has come to control their own destinies and become their own bosses. The best investment is investing in number one.

Rather than starting out and building new companies from the ground up – a lengthy and often expensive process, white collar professionals are applying their skills to "white-collar franchises." The greatest asset these executives have is a wealth of intellectual capital – management skills, marketing, communications, human resources, strategic planning, and more. Purchasing and operating a "white-collar" franchise – not the traditional fast-food outlet or convenience store, allow these skills to be applied to a situation where the manager is his own boss.

Fortunes can be made in a recession. This is the right time to pursue self-employment. Labour costs are down and there is a large pool of available talent. Real estate prices have fallen. Finance rates – for those with good credit – are lower. In all, overhead for a business is much lower. Combine this with top management skills and one has a winning combination for a successful business through franchising.

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Here Comes the Sun

Brighter days are on the horizon, according to leading financial experts in Ottawa. Canada is emerging from the financial recession. According to recent statements to reporters by Federal Finance Minister Jim Flaherty, the Canadian economy has stabilized and recovery has started. Mr. Flaherty noted that consumer confidence is relatively strong and continuing to grow. This is reflected in improved retail sales and positive numbers of home sales. He added that nearly 1000 infrastructure projects are currently underway across the nation.

The Bank of Canada strongly supported Mr. Flaherty's statements, forecasting that the economy will bounce back much faster than that of the United States. The Bank predicted that the summer quarter should produce growth of almost 1.3 percent, following three consecutive quarters of contraction.

Bank of Canada officials cautioned, though, that Canadians should not become overly optimistic, and should keep the country's financial recovery in proper perspective. The tenuous financial positions of both the U.S. and Europe may continue to affect Canadians. Canadian government stimulus spending must also be rescinded at the proper rate in order to not be counter-productive.

Canada has not incurred massive deficits in recent years, thus contributing to its relatively strong financial position and its ability to recover from the recession in a shorter period of time than others. Leading bankers in the U.S. are also predicting recovery for the American nation. However, due to massive government debt, the fragile American economy has been slower to recover. The decline of the American economy has slowed its pace and analysts predict that growth will begin in the latter portion of this year.

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