gardiner roberts llpcompany shares and real estate 3. business tax measures • small business...

Gardiner Roberts LLP

Toolbox Seminar

May 6, 2015

Selected Highlights of the FederalBudget April 21, 2015

Toolbox Seminar

May 6, 2015

Presented by:Lorne Saltman

Personal Tax Measures

• TFSA - Annual contribution limit increased from$5,500 to $10,000

• RRIFs - Reduced annual withdrawal factors

• Charitable Donations - Permitting tax-freedonations of proceeds from sale of privatecompany shares and real estate

3

Business Tax Measures

• Small Business Deduction - Starting in 2016, theFederal rate will drop from 11% to 9% over 5years, so that in 2019 in Ontario the combinedcorporate small business rate will go from 15.5%to 13.5%

• CCA for Manufacturing Equipment - Extensionfor 10 years of the fast 50% write-off

• Synthetic Equity Arrangements

• Butterfly Transactions

4

This information has been presented to you courtesy ofGardiner Roberts LLP as a service for our clients and otherpersons dealing with tax and estates issues. It is not intendedto be a complete statement of the law or an opinion on any

subject. Although we endeavour to ensure its accuracy,no one should act upon it without obtaining proper

legal advice, following a thorough examination of thefacts of a specific situation and the applicable law.

Scotia Plaza, 40 King Street West, Suite 3100Toronto, ON, Canada, M5H 3Y2

T: 416 865 6600 F: 416 865 6636 www.grllp.com

Lorne SaltmanPartner

Direct: 416 865 6689 [email protected]

L orne Saltman is a Partner with Gardiner Roberts LLP and the Head of our Tax Group. He has extensive experience in diverse areas of tax practice, including

in-depth experience on both the international and domestic levels involving wealth preservation for high-net worth clients, cross-border acquisitions and financings, corporate reorganizations, real estate ventures, and the establishment of offshore trusts and private foundations.

He has a successful track record in resolving disputes with tax authorities at both the federal and provincial levels, including some experience in tax litigation.

Lorne has in-depth experience in tax and estate planning, both domestic and international, for entrepreneurs as well as corporate executives, involving estate

freezing of private corporations, the settlement of family, discretionary trusts and the establishment of private charitable foundations.

AREAS OF PRACTICE AND INDUSTRY SPECIALTY• Tax and Estate Planning – Taxation (personal and corporate), Tax Disputes, International Transactions, Limited

Partnerships, Family Business Planning, Family Trusts, Business Reorganizations, Estate Planning, Estate Freezes

EDUCATION• Osgoode Hall Law School, LL.B.• University of Toronto, B.Sc.


T: 416 865 6600 F: 416 865 6636 www.grllp.com

MEMBERSHIPS• American Bar Association, Business Law Section, Taxation Committee, Advisory Panel • American Bar Foundation • Advocates for Civil Liberties Inc., President and Director • Canadian Bar Association • Canadian Jewish Civil Rights Association, Secretary/Treasurer, and Director• Canadian Tax Foundation • Hague Academy of International Law • International Bar Association • International Commission of Jurists• International Fiscal Association • International Tax Planning Association • Ontario Bar Association • Society for Estate and Tax Practitioners (“STEP”) • Toronto Chinese Community Services Association

REPRESENTATIVE MATTERS• Advised a Canadian bank on establishing referral agreements with selected independent trustees in

tax-favoured jurisdictions for compliant, non-resident trusts for Canadians;• Advised a Caribbean country on its tax treaty negotiations;• Provided legal advice on transfer pricing policies of Canadian-based telecommunications corporation with

significant pension plan deficit in foreign affiliate;• Advised a multinational mining corporation on its $1.6 billion acquisition of assets from a multinational gold

producer, and on its $2.1 billion acquisition of shares of another public mining corporation; • Advised a public company on its conversion into a public income fund and with respect to ongoing issues; • Established captive insurance companies in Barbados for a Canadian-based multinational in the steel

manufacturing business and a Canadian-based real estate development company with U.S. operations; • Developed a tax and corporate structure in Canada and the U.S.A. for a software development initiative between

leading American software company and Canadian private equity fund;• Established an estate freeze trust/corporate structure for partners in a new Canadian investment bank;• Advised a successful Canadian interior decorator on his acquisition of U.S. real property interests;• Advised an ultra-high-net-worth Canadian resident on a departure tax plan involving a private charitable

foundation;• Advised a terminally-ill doctor on reorganizing his affairs, including share and debt capital reorganizations,

settling an Alter Ego Trust and Principal Residence Trust, and revising Wills to include testamentary trusts;• Established a Barbados-based trust and corporate structure to protect business and investment assets of

Venezuelan families;


T: 416 865 6600 F: 416 865 6636 www.grllp.com

• Negotiated successfully with the Canada Revenue Agency in connection with voluntary disclosures of unreported income for an individual with investment income from a foreign jurisdiction with a blocked currency, for a computer software company whose managing director appropriated assets and funds from the company, and for a Canadian-based multinational corporate group with defective international tax planning;

• Negotiated successfully with the Canada Revenue Agency in the settlement of a tax claim exceeding $6 million against a trio of world-famous entertainers, who used a complex tax structure in connection with performances in Canada.

LECTURES AND PUBLICATIONS• “Canadian Investment in U.S. Real Estate – Structuring for Commercial and Personal Investments”,

presentation at 2nd Biennial Ontario - New York Legal Summit, March 28, 2014, Toronto, Ontario;• “Tax Planning for Canadians Doing Business in Latin America”, presentation for the Canadian-British

Chamber of Trade and Commerce, February 20, 2013, Toronto, Ontario;• “Preserve Assets with a Principal Residence Trust”, article for online Rogers Media: Advisor.ca, January 8,

2013;• “Tax Planning for New Immigrants and Returning Residents”, presentation at Federated Press Seminar,

November 7, 2012, Toronto, Ontario.

Capital Gains Exemption: Update onPurification Strategies

Toolbox Seminar

May 6, 2015

Presented by:Josh Harnett

Capital Gains Exemption

• Single, lifetime exemption from tax on capitalgains arising from dispositions of certainproperties – “qualified small business corporationshare” (QSBCS)

• Exemption is indexed to inflation

• 2015: $406,800 to offset $813,600 of gains

• Available only to individuals

• Can be accessed via a trust if proper designationsare made under subsections 104(21) and (21.2)

7

Qualified Small BusinessCorporation Share

• Defined in subsection 110.6(1)

• Qualification is determined at a particular time –the “determination time”

• Three components of definition:

1. Share of the capital stock of a “small businesscorporation”

2. 24 month holding period

3. 50% asset test

8

Share of Small BusinessCorporation

• Corporation must be an SBC at the determinationtime

• In order to qualify, at least 90% of corporation’sassets (based on relative values) must be usedmore than 50% in an active business carriedprimarily in Canada

• SBC requirement creates the “90% Test”

9

24 Month Holding Period

• In order to qualify, share must be held throughoutthe 24 months immediately before thedetermination time by the individual seeking toclaim the exemption or a person or partnershiprelated to that individual

• Newly issued shares are considered previouslyowned by a non-related person

• Certain deeming rules in subsection 110.6(14) forrollovers

10

50% Asset Test

• Throughout 24 month holding period, 50% of thefair market value of the corporation’s assets mustbe attributable to

• Assets used principally in an active business carriedon primarily in Canada by the corporation or acorporation related to it;

• Shares or indebtedness of “connected” corporationsthat meet the 50% asset test; or

• Any combination of the two

11

“Good” Assets

• What are assets used principally in an activebusiness?

• Will depend on the facts, but will generallyinclude any assets used to earn active businessincome

• Not used to earn income from property

• Goodwill is generally a “good” asset

• Properly valuing goodwill is important in this contextand can be critical in determining whether or not theasset tests are satisfied

12

“Bad” Assets

• What are assets not used principally in an activebusiness?

• Assets that are not used to earn active businessincome

• Examples:

• Cash (beyond the cash flow/working capital needs ofthe business)

• Marketable securities

• Non-business real estate

• Other investment assets

13

Cash as a “Bad” Asset

• There is no set rule for determining what amountof cash is being used as an active asset

• CRA has published administrative guidelines toassist in making the determination

• CRA’s general position is that cash is usedprincipally in an active business if its withdrawalwould destabilize the business

• CRA has additional guidelines that apply tospecific situations, such as seasonal businesses

14

Two Asset Tests

• 50% Asset Test

• Must be satisfied on an ongoing basis

• If not met at any time, then 24 month periodeffectively restarts

• 90% Asset Test

• Only needs to be met at determination time• E.g., time of sale

• Consider other reasons why corporation may need tobe an SBC, e.g., corporate attribution

15

Purification

• What can be done if the corporation does not meetone or both of the asset tests?

16

Purification – Example 1

• Mr. X owns 100% of X Inc.

• X Inc. carries on an active business in Canada

• Y Inc. makes offer to purchase 100% of X Inc.

• X Inc.’s assets consist of, in part, $1 million ofcash not used in X Inc.’s active business

• How can X Inc. become an SBC?

17


• X Inc. paysdividend toMr. X ofexcess cash

• Consider relativetax cost

• May not betax efficient

Mr. X

X Inc.

$$$

18



• X Inc. carries on an active business in Canada

• X Inc. owns real estate not used in its activebusiness

• Value of real estate exceeds value of activebusiness assets – 50% test not met

• How can X Inc. satisfy 50% asset test?

• Consider: Single wing butterfly

19


Mr. X

X Inc.

RE

FMV = $1.5 million

FMV = $1 million

20


• Mr. XincorporatesNewco

Mr. X

X Inc.

RE

Newco

FMV = $1.5 million

FMV = $1 million

21


• Mr. X transfersshares of X Inc.to Newco

Mr. X

X Inc.

RE

Newco

FMV = $1 million

FMV = $1 million

22


• X Inc. transfersRE to Newco

Mr. X

X Inc. NewcoFMV = $1 million

RE

FMV = $1 million

23


• X Inc. andNewco cross-redeem shares

Mr. X

X Inc. Newco

RE

FMV = $1 million

24


• Transfers can be implemented on a tax-deferredbasis

• Consider HST and land transfer tax issues

• Cannot implement this reorganization immediatelyprior to sale

• Why? Subsection 55(2)

25

Subsection 55(2)

• Anti-capital gains stripping rule

• Will convert otherwise tax-free inter-corporatedividends into taxable capital gains if dividendsexceed “safe income”

• Two exceptions:

• 55(3)(a) – related party reorganizations

• 55(3)(b) – divisive reorganizations

26

Subsection 55(2) and Example 2

• Cross-redemption of shares between X Inc. andNewco gives rise to deemed dividends undersubsection 84(3)

• Subsection 55(2) will re-characterize thesedividends as capital gains if result of dividends isto reduce the capital gain on any share

• But can rely on paragraph 55(3)(a)

27

Paragraph 55(3)(a)

• Generally permits related party reorganizations

• Will not apply if any one of five “triggering”events occurs – transactions with “unrelatedpersons”

• Determined by reference to the corporation payingthe dividend

• Includes “series of transactions” concept

• Paragraph 55(3)(a) will not apply if dividend is partof same series of transaction that includes atransaction with an “unrelated person”

28

Series of Transactions

• Common law concept is expanded by s. 248(10)

• In Copthorne, Supreme Court of Canada held thata series of transactions should be viewed bothprospectively and retrospectively

• Events either before or after the particulartransaction can be said to form part of a series oftransactions that includes a particular transaction

• The question is whether the particular transactionwas carried out “in contemplation of” or withknowledge of previous events or events to occur inthe future

29

Series of Transactions

• Returning to Example 2, if after the purificationtransaction, X Inc. is immediately sold to an“unrelated person”, the sale transaction would beconsidered as part of the same series that includes thedividends, and paragraph 55(3)(a) would not apply

• If the sale to an “unrelated person” is not immediate,consider whether it forms part of the same series

• In light of Copthorne, there is a risk of the transactionsbeing part of the same series if a sale wascontemplated at the time of the purification

30

Ongoing Purification

• Corporate attribution rule in section 74.4 can applyto many estate freezes

• Deemed income inclusion based on value of freeze

• Corporate attribution does not apply where thetransferee-corporation is an SBC

• Use ongoing purification structure to ensuretransferee-corporation is always an SBC

• Ongoing purification also helpful to ensure that50% test is always met

31



• X Inc. has a value of $5 million

• Mr. X wants to implement an estate freeze infavour of a new family trust

• Beneficiaries will include Mrs. X and the minorchildren or Mr. and Mrs. X

• X Inc. must always be an SBC to avoid corporateattribution. How?

32


Mr. X

X Inc.

X Trust

$5 millionpreferredshares

Common shares

33


Mr. X

X Inc.

X Trust

$5 millionpreferredshares Common shares

Benco Beneficiary

34


Mr. X

X Inc.

X Trust

$5 millionpreferredshares Common

shares

Benco Beneficiary

Dividends

Dividends

35


• Dividends paid on the common shares owned by XTrust prevent the build up of excess cash in X Inc.so that SBC status is maintained

• X Trust allocates the dividends to Benco, whichcan then deduct the dividends so that dividends aretax-free

• The value of Benco accrues to Mr. X, but capitalgains exemption multiplication remains possiblethrough X Trust’s shares of X Inc.

36

Part IV Tax

• What happens if X Inc. is owned 50% by Mr. Xand 50% by Mr. Y who is not related to Mr. X?

• Assume both Mr. X and Mr. Y have undertaken afreeze of their interests in X Inc. in favour of newfamily trusts

• Dividends paid by X Inc. to the two trusts couldstill be allocated to corporate beneficiaries

• However, Part IV tax will apply

37

Part IV Tax

• 33 1/3% tax on dividends received by privatecorporations

• Part IV tax does not apply where payer corporation is“connected” with recipient corporation

• To be “connected” the recipient must either• “Control” the payer; or

• Own shares having more than 10% of the votes and valueof the payer

• In a 50/50 scenario, no one will control X Inc.

• X Benco and Y Benco will not own any shares of XInc.

38


Mr. X

X Inc.

X Trust

X Benco

Mr. Y

Y Trust

Y Benco

39


Mr. X

X Inc.

X Trust

X Benco

Mr. Y

Y Trust

Y Benco

Y Holdco X Holdco

40


• X Inc. pays dividends to X Holdco and Y Holdco toprevent the build up of excess cash

• X Holdco pays dividends to X Trust, which areallocated to X Benco; Y Holdco pays dividends to YTrust, which are allocated to Y Benco

• On sale of X Inc., X Trust and Y Trust can either:• Sell shares of X Holdco and Y Holdco, respectively; or

• X Holdco and Y Holdco can amalgamate into X Inc., andAmalco is sold

• For this reason, X Holdco and Y Holdco cannot retainexcess cash

41


• By interposing X Holdco and Y Holdco, Part IVtax should not apply to dividends from X Inc.because both X Holdco and Y Holdco will holdshares of X Inc. having more than 10% of thevotes and value

• Part IV tax also should not apply to dividendsfrom X Holdco to X Benco via X Trust because ofcommon control of X Holdco and X Benco

• Same analysis applies for Mr. Y’s corporations

• Must ensure common control of Holdco and Benco

42

Questions?

43

This information has been presented to you courtesy ofGardiner Roberts LLP as a service for our clients and otherpersons dealing with tax and estates issues. It is not intendedto be a complete statement of the law or an opinion on any

subject. Although we endeavour to ensure its accuracy,no one should act upon it without obtaining proper

legal advice, following a thorough examination of thefacts of a specific situation and the applicable law.


T: 416 865 6600 F: 416 865 6636 www.grllp.com

J osh is an associate lawyer and member of the Tax and Estate Planning Group at Gardiner Roberts. He has gained experience in a variety of domestic and

international taxation matters, including mergers and acquisitions, debt and equity financings, corporate reorganizations, and trust, estate and succession planning. Prior to joining Gardiner Roberts as an associate in 2012, Josh practiced in the taxation group in the Toronto office of a leading Canadian law firm.

AREAS OF PRACTICE

• Tax and Estate Planning

EDUCATION• Called to the Ontario Bar, 2010• Osgoode Hall Law School, J.D., 2009 • York University B.A., 2006

MEMBERSHIPS• Law Society of Upper Canada • Ontario Bar Association • Canadian Tax Foundation

Josh HarnettAssociate

Direct: 416 865 3257 [email protected]

Gardiner Roberts Toolbox Seminar

Options in Maximizing Business Owner Liquidity

Presented by:Glenn M. Bowman, Managing DirectorCCC Investment Banking

May 2015

46

Table of Contents

SECTIONS

I. Introduction

II. Options in Maximizing Business Owner Liquidity

III. Valuation Drivers: Buy Side Perspective

IV. Valuation Drivers: Sell Side Perspective

SECTION I

Introduction

48

Introduction

CompanyValue

CompanyValue

Theoretical Value :

Discounted Cash Flow

Comparable Public Companies

Comparable M&A Transactions

Relative Contribution

Theoretical Value :

Discounted Cash Flow

Comparable Public Companies

Comparable M&A Transactions

Relative Contribution

Buyer’s Ability to Pay:

EPS Accretion/Dilution

Leveraged Buy-Out

Debt Capacity

Buyer’s Ability to Pay:

EPS Accretion/Dilution

Leveraged Buy-Out

Debt Capacity

Other:

Type of Buyer (strategic/financial)

Tax Issues

Other:

Type of Buyer (strategic/financial)

Tax Issues

Strategic Value:

Incremental Revenue

Cost Savings

Synergies

Strategic Value:

Incremental Revenue

Cost Savings

Synergies

SECTION II

Options in Maximizing Business Owner Liquidity

50

Business Owner Liquidity Alternatives

BUSINESS OWNER LIQUIDITY ACTION PLAN

Analyze the Company’s position in the industry relative to that of its competitors

Formulate a long-term business strategy

Determine the Company’s capital needs to execute the strategy

Examine business owner liquidity needs, employment preferences and other income/value issues such as real estate

Determine the financial structure/ownership profile that best supports the business strategy and the needs of the businessowner

Formulate a plan to achieve all of the above goals

Get professional help to assist in the formulation and execution of the business owner liquidity plans

51


THE LIQUIDITY PROCESS

MAXIMIZING BUSINESS OWNER LIQUIDITY

Conditions in the capital markets exert considerable influence on the breadth and magnitude of business owner liquidityinitiatives. However, much like the construction of a new home, the use of superior materials alone will not insure a beautifuland fully functional end product. The selection and detailing of design plans and fine craftsmanship are necessary in order toachieve a truly successful completion of the project.

In a similar way, a business owner liquidity initiative must combine capital market conditions with a well-conceived game planand execution skills in order to produce superior results.

Our experience confirms that the most successful business owner liquidity initiatives are achieved when all the alternativesare examined. A disciplined process focused on the viability and execution of business owner liquidity initiatives materiallyenhances the potential for maximizing investment value. Major steps to the liquidity process are outlined below.

Identify and prioritize primary business owner and management objectives

• Control/Ownership

• Value

• Liquidity

• Succession

• Legacy

Conduct corporate business assessment and valuation

• Due diligence

• Forecast modeling

• Debt capacity assessment

• Value parameters

52


THE LIQUIDITY PROCESS (CONT.)

Develop strategic alternatives for presentation to business owner

• Review owner objectives

• Describe alternatives

• Deliver value parameters for each liquidity alternative

• Overview of tax and risk factors

Initiate game plan and develop information memorandum as appropriate

• Draft circulation document

• Identify and stratify candidates

• Identify acceptable transaction structures

Contact most likely sources of interest (acquirors, capital providers and/or institutional investors) and disseminateinformation memorandum as appropriate

• Distribute sanitized summaries

• Obtain confidentiality agreements

• Manage distribution of information memorandum

• Manage due diligence and additional information requests

• Obtain bids

Meet with short list of potential investors/capital sources

• Orchestrate management presentations

53


THE LIQUIDITY PROCESS (CONT.)

Entertain final offers/financing participation and negotiate transaction price and terms or price the equity offering

• Multiple management/business owner meetings

• Assess and negotiate offers

• Final selection

Develop transaction closing documents

• Coordinate timeline and execution team

• Negotiate and review documentation

• Closing and opinion rendering (if necessary)

Attaining investment liquidity requires a strong commitment on the part of the private company business owner. In order tomaximize business owner liquidity, the process requires a disciplined approach to establish the range of viable options,attainable pricing and an achievable and organized execution plan. Realistic expectations and an experienced, dedicatedteam can meet the economic and personal objectives established at the onset of the initiative and give the private companybusiness owners the just rewards of years of equity ownership and business commitment.

The following pages present strategic alternatives and many of the related key considerations.

54


BUSINESS OWNER STRATEGIC ALTERNATIVES

Complete sale to strategic or financial buyer

Partial sale to minority equity investor

Debt finance leveraged recapitalization (management buy out)

Employee/Management Buy Out

Initial Public Offering

55


STRATEGIC ALTERNATIVES

SALE OF ASSETS/SHARES

This strategy involves the sale of all the assets or stock in a change-of-control transaction. The prospective acquiror may be afinancial or strategic buyer. As stated earlier, strategic buyers will generally pay more for the business due to economies ofscale or operating synergies brought about by the combination of the business entities. The sale process generally takesplace in a competitive environment among a select group of targeted buyers. The number of buyers approached is tailored toeach situation so as to accommodate the seller’s objectives and confidentiality requirements.

CONSIDERATIONS

Confidentiality

Numerous sales strategies to fit owner’s needs

Liquidity for all, or potentially all, business owners

Potential to achieve highest value for stock (“control” position)

Cost/time requirement

Industry consolidation

Financial capacity of buyer

Release of sensitive information to multiple parties

Disclosure requirements

Corporate culture of acquiror/merger partner

Management structure pre- and post-deal

Necessity of future growth through acquisition

Platform or add-on company characteristics

Transaction pricing driven by marketplace and projected earnings expectations

Management continuity

Terms and conditions of purchase agreement

56


STRATEGIC ALTERNATIVES (CONT.)

PRIVATE PLACEMENT

In this strategy, the business owner’s investment is cashed out or recapitalized through a combination of senior debt andprivate equity capital. An equity investor, potentially in conjunction with management and/or other employees, would purchasestock. The equity interest purchased by an outside investor may be a minority or control position.

There are many sources of private placement funds and numerous ways to structure a transaction. Taking the financing tomarket would yield competitive bids, but the required rate of return on private equity and mezzanine capital tends to bemarkedly higher than the investment rates of return expected in the public markets or by strategic buyers. This investmentreturn premium is primarily due to investment illiquidity.

CONSIDERATIONS

Flexibility of terms

Sophistication of investors

Rapid execution

Abundance of debt capital available

Retention of corporate culture and current management

Industry/market/company risks in remaining independent

Management continuity

Mezzanine and equity IRRs of 18% - 35%+

Disclosure requirements

Recent spread increases in high yield debt market

Low value alternative given the return requirements of private equity capital providers

Short-term investor: time horizon of 4 – 7 years

57



MANAGEMENT BUYOUT

This strategy encompasses the sale of stock to management and key employees, allowing for a staged or one-timeownership transition from the company to its management. This alternative can result in the staged divestiture as ownership istransferred to management and employees over a series of multiple transactions with contractual safeguards for both sellingbusiness owners and management/employee buyers. The most compelling advantages to this liquidity initiative are theintimate knowledge of the business by the buyer and the very discreet nature of the transaction.

CONSIDERATIONS

Relatively low cost

Liquidity for primary business owner

Few time constraints

Maintain corporate culture

Relatively less focus on earnings and earnings trends

Industry/market/company risks in remaining independent

Financing capacity

Staged divestiture

Cost of capital

Resources usually limited for management and employees

Debt repayment will limit capital available for diversification and acquisitions

58



IPO

This strategy involves the sale of existing and/or newly issued shares to the public. For the right company in the right industrythis alternative can present substantial financial rewards. A common perception among business owners is that to gainliquidity they need to take their company public. While this route is optimal for some, more often it is not the ideal solution fora middle-market company. Very rarely will a business owner be able to sell any substantial portion of its existing stock to themarket in the IPO because public market investors are more interested in seeing their equity investments deployed to growthe business and not in cashing out existing business owners.

CONSIDERATIONS

IPO windows open and close very quickly

Long-term liquidity

Disclosure requirements: legal, financial, operational

Pre-IPO ownership structure

Limited short-term liquidity event for business owners

Size of deal/market perception

Revenue and earnings growth – historical and expectation

State of IPO market/market timing

Management team and board content

Expense and time to completion

Liquidity – in the long term

Access to capital for acquisitions and diversification initiatives

Quarterly earnings focus

Number of underwriters/scope of offering

Analyst support and coverage

Market expectations – company vision and strategy

After market trading volume

SECTION III

Valuation Drivers: Buy Side Perspective

60

Competitive Advantage

Confirm strategy supports objectives

CompetitiveAdvantageCompetitiveAdvantage

IncreaseEconomies

of Scale

IncreaseEconomies

of Scale

AcquireTechnology

AcquireTechnology

ExtendGeographic

Reach

ExtendGeographic

Reach

AchieveVertical

Integration

AchieveVertical

Integration

ExpandDistribution

ExpandDistribution

BroadenProduct Lineor Services

BroadenProduct Lineor Services

61

Gap Analysis

Information

TargetedBusinessAttributes

Infrastructure

People

Products/Services

Markets/Channels

Technology

Review competitive position and resource base

62

Sequencing and Timing

Pricing Strategy

Cost Structure

Product/Service Mix/Customer

Value Proposition

Acquisition Pricing Rationale

Capital Sources/Cost

Prospective Transaction Structure

Strategic Planning

Make vs. Buy decision

Does acquisition strategy execution addincremental value?

COMPONENTS MARKET PERCEPTION

63

Issues, Assessments and Considerations

Determine if acquisition adds incremental value

VALUATION ISSUES COLLATERAL CONSIDERATIONS CREDIT CONSIDERATIONS

Public vs. Private buyer

Cash flow vs. Earnings focus

Old peer group vs. New peergroup

Growth quotient

Capital structure mix

Liquidity measures

Cash flow (debt-service)coverage

Size/minimum financialrequirements

Industry

Geography

Deal or transaction type

Captive management

SECTION IV

Valuation Drivers: Sell Side Perspective

65

Don’t Underestimate the Process

SELL SIDE PROCESS

How you market, position and present your company makes a big difference

Business strategies, value drivers and synergies

Process takes up time

Confidentiality, employee and customer solidarity

Shareholder and management consideration sharing

Get the right team of advisors

Develop clear strategy with focused execution plan

66

Shareholder Objectives

Shareholders’ objectives must be aligned with strategy

Liquidity transaction

Maximize price – payable in cash

Preserve the culture of the company

Maintain or improve competitive position

Finance ongoing growth or consolidation

Protect confidentiality and privacy

Take care of employees

67

Price vs. Value

Price, not value, is the overridingconsideration

Price, not value, is the overridingconsideration

The business owner is not interested in fairvalue, he/she wants unfair value

The business owner is not interested in fairvalue, he/she wants unfair value

There is no such thing as value, only priceThere is no such thing as value, only price

68

Evaluation of Buyers

CORPORATE:STRATEGIC

FINANCIAL:PLATFORM/STAND-ALONE

FINANCIAL:STRATEGIC/ADD-ON

Usually highest price

Low reliance on existingmanagement

Complete liquidity

Relatively highconfidentiality concerns

Seldom highest price

Management essential

Reinvestment usuallyrequired

Low confidentialityconcerns

Often pay high prices

Management desirable

Reinvestment usuallyoptional

Some confidentialityconcerns

69

Threshold Questions

FROM FINANCIAL BUYER FROM SELLER

Does company dominate a niche?

Is the cash flow stable?

Are the margins better than average?

Will the business grow significantly inthe next 5 to 7 years?

Is this an industry the acquirer hasexperience in?

Is there a viable exit strategy?

Do I want to retain an equity interest inthe company?

Do I want to remain active in thebusiness?

Do I need maximum value today?

70

Thank you!

Glenn M. Bowman, Managing Director

CCC Investment Banking

150 King Street West, Suite 2020

Toronto, Ontario M5H 1J9

[email protected]

Business: 416-619-9103

Mobile: 647-283-1355

Glenn M. Bowman, FCPA, FCA, CBV, CF,Managing Director

Glenn joined CCC in 2014, he specializes in advising clients onacquisitions and divestitures private debt and equity financings, financialrestructurings, business and securities valuations, and fairness opinions.

Glenn was the Managing Partner at Capital Canada Limited, amid-market investment bank located in Toronto. He was formerly thePresident and Director of the Toronto office of Houlihan Lokey. Glennbegan his career at Coopers & Lybrand where he specialized in the firm'sbusiness valuation practice. He is a Fellow of the Institute of CharteredProfessional Accountants of Ontario, a Chartered Business Valuator andholds a Corporate Finance Qualification with the Canadian Institute ofChartered Accountants. He has served as a member of the SmallBusiness Advisory Committee of the Ontario Securities Commission aswell as the Accounting Standards Board of the Canadian Institute ofChartered Accountants.

Glenn currently serves on the corporate boards of Rockcliff ResourcesInc., WireIE Holdings International Inc., and Sphere 3D Inc. Glenn is agraduate of the University of Toronto.

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