1. CCIM Maximize your business value May 28, 2008 Presented by Tom Strezos

2. 1 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Succession – What it is & isn’t It isIt isn’t A process An event About family & relationships person’s problem About ownership, management, Only about taxes estate and taxes About fairness About equality Driven by family values Driven by accountants lawyers and insurance agents concern A process to transfer control & Only about ownership ownership

3. 2 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Common exit strategies Passing the business to family members Selling the business to partner or employee Sale to third parties Winding down the business Other

4. 3 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Common exit strategies cont’d Passing the business to family members – Identify the successor – How to deal with inactive members – Who will control – What is most tax efficient method

5. 4 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Due diligence Shares/Assets Be Prepared!!! Have information available in the “War Room” Ensure information is up to date

6. 5 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Due diligence cont’d Annual financial statements (preferably audited) Corporate tax returns and assessments Interim financials Contracts executed and updated Banking agreements Organization charts Lease contracts Projections Business/marketing plans Lawsuits

7. 6 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Due diligence cont’d Allow access to CFO/Controller A proper due dilly could include an industry analysis How are Redundant Assets Dealt With?

8. 7 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Due diligence cont’d Assets not needed in the day to day operation of the business – could include excess cash, patents, brands, –licenses –Example of a good deal gone real bad

9. 8 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Business valuation Did You Know? –The owners of 56% of Canadian family businesses will retire within 10 years. –43% plan to sell their business within 10 years. –Less than 25% have succession plans in place. –Less than 30% of family businesses no matter how successful continue into a second generation. –Only 10% of family businesses survive to a third generation.

10. 9 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Business valuation cont’d Who Should Be Interested in Planning Now: Individuals who are; –Considering selling their business or retiring. –>50 years of age. –Planning on passing on the business to family members. –Already have family members in the business.

11. 10 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Business valuation cont’d And Should Be Asking Themselves… –Where is their business going in the next 5/10 years? –What role will the existing owners be playing in 5/10 years? –Have they considered starting assembling or have in place an exit strategy team?

12. 11 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Valuation – When is it time to sell? Company is in overall good shape. Profitability is strong and on an upswing. Management team is competent and will stay on. Outlook for the business and the sector is attractive. Economic conditions are encouraging to buyers.

13. 12 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Valuation – Forms of consideration Cash Vendor take-back (Note) Earn-out Stock (common & preferred) Non-compete fee Management contract Consulting agreement

14. 13 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Valuation cont’d FMV is: Highest price available Open and unrestricted market Informed, prudent parties Arm’s length No compulsion to act Expressed in cash

15. 14 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Value vs Price Value –What the company is worth Price –The actual amount paid by a purchaser

16. 15 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Valuation – Transaction multiples - private

17. 16 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. General principles Future earnings / cash flows are key Using historicals Considerations in assessing risk Special purchasers

18. 17 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Valuation approaches Earnings / cash flow based Asset based Rules of thumb Comparison approach Is the Company a Going Concern?

19. 18 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Valuation decision tree

20. 19 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Valuation approaches cont’d Asset based approach: –Uses balance sheet –Adjusted book value –Used for liquidation approach or usually Holdco’s

21. 20 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. COST APPROACH cont’d Liquidation approach: –Establishes a base value –Assumes an orderly liquidation –Not a “fire sale” Danger points: –Equipment –Receivables –Investments– Pubco – Private Co.

22. 21 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Earnings based approaches Earnings / cash flow based approach: Capitalization of maintainable future earnings (“CE”) Capitalization of maintainable future cash flows (“CCF”), and Discounted cash flows (“DCF”) Earnings based approach: Need to consider: –Projected incomes –Discounting those projections –Hindsight – passage of time

23. 22 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Earnings based approaches cont’d Value = Present value + redundancies

24. 23 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Earnings based approaches cont’d Capitalization rates / Multiple: Will depend on: –External factors –Internal factors

25. 24 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Earnings based approaches cont’d Capitalization rates / Multiple: A valuation will usually consider: –Ten year Government of Canada bonds –Corporate bond yields – long term –Prime rate charged by Cdn banks –Inflation –Risks –Private acquisition multipliers 3-6 x EBITDA

26. 25 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Other approaches Rules of Thumb (“ROT”): Caution when using this method

27. 26 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Other approaches cont’d Comparison Approach: Use comparable sales transactions Must be comparable How many? / Is one good enough? / Who decides? Rarely used in Canada

28. 27 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Comparison approach Comparison Approach: CAUTION Comparable sales transactions must be comparable Often used for real estate appraisals Multiple comparison?

29. 28 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Goodwill Goodwill = Value of the business - TAB That is: –The value in excess of the Company’s tangible asset backing. –Represents the intangible value of the business

30. 29 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Goodwill cont’d There are two types of goodwill: (1) Personal goodwill Attaches to proprietor of the business Cannot be sold or transferred Therefore, has no commercial value

31. 30 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Goodwill cont’d (2) Commercial goodwill Attaches to the business Has value and can be transferred

32. 31 CCIM - Maximize your business value© Deloitte & Touche LLP and affiliated entities. Remember, it’s an opinion Each valuator/appraiser is different There is a range of values Ask three different valuators and you may get three different opinions on value. –It’s an art, not a science!

33. CCIM Maximize your business value Thank you! Tom Strezos, CA, CBV, CFE 416.644.4377 tstrezos@deloitte.ca

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