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The Leveraged Capital Newsletter,
sponsored by Graham Financial Corporation
(http://www.GrahamFinancial.com),
is a free monthly newsletter that presents growth You are receiving this newsletter because you have requested that we send you our monthly editions. We do not believe in "spaming" anyone. Your time is valuable and if you have received this newsletter in error, please let us know. If you do not want to continue to receive Leveraged Capital please see our unsubscribe instructions at the bottom of this edition. To subscribe mail to:
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with the word "subscribe" in the subject field. Any words that I attempted to write this week seemed to
come appallingly short of the depth of horror and sadness that I have felt over
the Tuesday attacks in the United States. To
our American friends, we extend our heartfelt sorrow, support and prayers for
the pain that you are experiencing. I pray
specifically for healing that is so badly needed in your great nation and for
wisdom for leaders around the world who must respond to this attack on the very
nature of our societal freedoms. I have talked this week with a
number of people in the financial community of Toronto that have
been drawn into this frightening situation through family, friends, and colleagues
that worked in the World Trade Centre. We continue to pray for them as well.
We have all been touched by the sickening and maddening events of last
Tuesday. May this week be a reminder to us all of the
fleeting nature of our lives – take some time, everyday, to let those around
you know how important they are to you. DPG. In this months issue: ============================================================== Investment
Hindsight: ============================================================== Welcome to the Leveraged Capital Newsletter. Our goal is to provide you with timely and informative articles about growth and strategy issues effecting entrepreneurs and small to medium sized companies. Each month Leveraged Capital will deal with issues affecting your business. You will be able to read topics ranging from finance, human resources, buying companies, selling your company, and technology. In coming months you will read profiles about other entrepreneurs and current decision makers. We will keep timely content levels high, advertising content low, and welcome your feedback. Are you interested in contributing articles?
Or, do you have an interesting and unique story to tell about your
company? We would like to interview you. ==============================================================
This multipart series will take you through the sale process from start to finish. Part One - Is It
Time? See the Jul01 Issue
of Leveraged Capital. SELLING YOUR
BUSINESS – PART THREE:
WHAT'S IT WORTH In part one of our series we explored pre-sale considerations to selling your company. Part two discussed the effective packaging and marketing your company for sale. In this the third of our four part series, our Director of Client Strategies, Dan Gregory, discusses valuation methods and pricing considerations that you should be aware of. The value of a business depends upon what it is worth to the buyer not to the seller. In order to negotiate from a position of strength, one must value their company based on accepted valuation models. With the ability to quantify the value, you are reducing the negotiation power of the buyer. For our discussion purposes, we will only consider valuation models utilized for non-publicly traded companies. Publicly traded companies can be generally valued with these models however other influences such as market swings, minority interests, etc., greatly affect the values. Variations of valuation models do exist, with some complex models having been created over the past few years. However, I will discuss five general models that you should be aware of: 1. Asset Based Value - Book Value and Adjusted Book Value; 1. Asset Based Value. The asset-based model examines the economic or market value of the company's assets. The book value method takes into consideration only the cost of the assets and liabilities. The book value is generally a test of the companies going concern value. If the company sold it's assets and paid off its liabilities would there be any residual value or cash remaining? In an open market both the buyer and the seller will negotiate based on the
market value of the assets and liabilities. With this in mind another model is
the adjusted book value method. The adjusted book value methodology is to value
each asset at its market or economic value and then add the current
shareholders' equity. Included in these adjustments is consideration for
goodwill values. Both of these valuation models assume that generated cash
flow is consistent and unchanging. However over the last 10 years more attention
has been paid to the cash flow generated by these assets. Therefore the asset
based value model is utilized more as a test value or backup rather than the
standard used today. The mechanics of the valuation is to value the assets at their net realizable value (what the asset is worth) less liabilities. The liabilities are valued at their face or current value. The net value is the amount of proceeds received from the use of the cash derived from the sale of the assets to extinguish the liabilities of the company. The liquidation value model is one in which we wish all our readers do not
have to deal with unless they are seizing the opportunity to be the buyer of
that company. Of the different cash flow models available all the models first must establish the company's Earnings Before Income Taxes and Depreciation and Amortization or EBITDA. One must take into consideration redundant assets, the capital expenditures required for sustaining the cash flow, and other normalization of income issues, such as excessive owner or family salaries, benefits, or other non operational expenses that would not exist after the acquisition. The discounted cash flow model determines the net present value of the company's future cash flows using an expected rate of return. The capitalized cash flow model establishes a value based on a multiple of cash flow. The multiple for an expected rate of return that a buyer may need of 25% would be 4. Often the forecasted cash flow is take into consideration and weighted based on historical cash flow. The overall method used is guided by the methods used in the company's industry. Software companies may use a discounted cash flow model using future expected EBITDA while a real estate company may use a market value approach combined with a capitalization of cash flow. Variations of the models may calculate value after tax or debt service.
Assume the EBITDA was consistent for 5 years. Therefore one might calculate a value range using multiples of 3 or 5, equal to $1,500,000 or $2,500,000 respectively, based on the normalized EBITDA of $450,000 illustrated above. However one must reduce this value by any bank debt or other interest bearing debt to arrive at an enterprise or purchase value. 4. Rule of Thumb Value. In any negotiation one may know
of completed deals in similar industries where the multiple of EBITDA is known.
Some industries have ranges of multiples such as transportation and CNC machine
companies. These ranges can be from 3 to 4.5 times EBITDA. However one must be
cautious as to "known" multiples as ever deal and situation is unique.
A lower multiple may have been paid due to an all cash deal. A higher multiple
could have been the result of the vendor's proprietary technology or the
vendor's niche market. One must find a buyer that is willing to pay the perceived value, i.e.., what
it is worth to them. Often a buyer will focus on the level of management depth as much as the demand for its product or service. If senior management is thin (for example, the owner/president is also the key sales driver) then the buyer may argue for a lower value. In some industries, such as transportation, health care, machining industries, there is a shortage of skilled workers. If you are trying to sell the companies future cash flows based on a percentage growth each year, these growth rates may depend upon your company's ability to maintain and attract the production staff necessary. Again, a possible argument to reduce the company's value. Companies with proprietary products or services will command a higher multiple or value than companies with no specialized product or service. One may consider developing such proprietary products or service in order to increase value. This process will take time and thus the reason to began the selling process before the immediate need or want to sell. The nature of the buyer will influence the company's value. Strategic buyers will often, but not always, pay a higher value than a financial buyer. A seller may wish not to sell to a strategic buyer but the increased value is a hard issue to ignore. The future of the company's industry is a key ingredient in value. If the industry is seen as a "up and comer" then higher values can be justified. The opposite can be stated for an industry under extreme competition from global competitors. The cyclical nature of the industry can influence the value. Large machine manufacturers for the automotive industry have cycles lasting two years rather than traditional seasonal cycles. Therefore these manufacturers have a higher risk and thus lower values. The values will reflect the risk of these cycles. In today's economic state one may consider trying to build the company to a stronger position rather than selling. During an economic slowdown the value received will generally be lower than in a robust economy. However buyers are always seeking opportunities thus value can be maintained to the right buyer. The valuation methods discussed here are basic starting points. Engaging an intermediary to assist you in understanding a true valuation of your company will be key to a successful closing of your deal for the best possible sale price. Click here to review Dan's profile. ========================================================= Meeting Your Office Space Needs. Turning a real estate solution into business solution is
perhaps not the first thing that comes to mind when faced with the dilemma of
where to locate your business, or whether or not it is time to move out of your
home office. Yet, to meet all your
business requirements, it may well prove to be just that. Recent articles in the media have extolled the benefits of flexible real estate solutions provided by two new on the Toronto scene Business Centres/Executive Office Providers. Large companies such as American Express, Coca-Cola and others have found that this concept allows them to put groups of people together for short term projects, where their clients are, without long term commitments and capital investment. Start-ups, dot.coms and high tech companies found similar benefits and cost savings by participating in existing technology and infrastructure. Such turn-key space and support providers have, of course, been around for many years, catering to companies such as Oracle, Forrester Research, PricewaterhouseCoopers as short term space solutions and to the entrepreneur, sole practicing professional and small business person as a permanent space and business solution. For over 14 years The King Street Professional Centre has been just such a business solution to a wide range of senior companies as well as those starting. Providing “A” class building office space in the Financial Core and a support team that is personable, skilled and committed to being part of the clients’ team, has contributed to the growth and success of companies such as Marketing Solutions and Rogers, Campbell Mickleborough, to name a few. The Centre offers a range of services accommodating even the most stringent budgets, starting from Mailing Address and Corporate Identity Plans to full time Executive Office Plans. Often the Mailing Address at $80.00/month is the first step for a client to establish him or herself in the downtown core. The Corporate Identity Plan, which includes personalized telephone answering, through the use of The Centre’s telecommunications technology can seamlessly make a home-office appear as a downtown office. Both plans allow for use of the meeting room facilities and support services. As they grow, many of our clients quickly move to a private, furnished office in the Centre. This move is seamless - no need to change address or telephone numbers and both you and your clients are familiar with the Centre staff. The Centre meets your needs by:
The King Street Professional Centre can meet all your needs and at a fraction of the cost of conventional leasing arrangements or the large scale international new executive suite providers. Here is what some of our clients have had to say over the years: “Thank you for the fantastic work! Your team was responsive, energetic and always willing to help – You were creative in coming up with solutions …. We appreciated the friendly and prompt responses … the sense of humour … ” “I have received many unsolicited, positive responses from clients and associates who have had contact with The Centre. The warm, pleasant personalities of the people make this a very pleasurable office environment ….” “I chose The King Street Professional Centre many years ago because it had the most professional presentation of any business Centre in Downtown Toronto. Since then I have had many compliments, not only on the professional presentation of the offices, but also on the personable staff and their ability to project as if they are employees of my company …. “I came to your Centre with high expectation in terms of quality of service and can only say that those expectations have not only been met but in fact surpassed in almost every regard …. As an added bonus, I have found the other clients here to be highly compatible in terms of their professionalism and the types of work they do, and the size of the facility to be on which is small enough to permit you to get to know some of the other clients and develop a bit of a sense of “family” .. To see just how efficiently The Centre can meet your needs,
call or visit: THE KING STREET PROFESSIONAL CENTRE 145 King Street West, Suite 1000 ========================================================
The American Council of Life Insurers (ACLI) – the major trade association for life companies – has prepared the following to answer the most frequently asked questions about how life insurers will meet their commitments to the families of the victims of the tragic terrorist attacks on September 11: 1. How will the events of September 11 affect the life insurance industry? As in communities across America, the life insurance community is grieving. We have families and friends affected by this terrible tragedy and we are mourning their loss. In the face of this devastation, though, we, and all Americans will persevere and rebuild. From a business perspective, the tragedy of September was a shock, but it is our job to be prepared for the unexpected. The life insurance has a critical role to play in circumstances like these, and that is exactly what we are doing. 2. Do “war exclusions” apply in this tragedy? No. We are unaware of any suggestions from any quarter of the industry that such exclusions are applicable in this instance. All claims prompted by the September 11 tragedy will be treated in a normal manner: companies will promptly pay death benefits to beneficiaries of the victims with life insurance coverage. In general, life insurance companies stopped inserting war exclusions in their contracts in the 1970s, with the end of the Vietnam War. The industry’s primary textbook, “Life and Health Insurance,” by Kenneth Black, Jr. and Harold Skipper, Jr., Thirteenth Edition, says: “Companies usually insert war clauses in their contracts during periods of impending or actual war, particularly for policies issued to persons of draft age. War clauses are typically canceled at the end of the war period.” 3. Do “terrorism exclusions” apply in these circumstances? Life insurance policies typically do not contain “terrorism exclusions.” It is highly unlikely that many, if any, victims of the tragedy had a policy with an exclusion that covered the attacks. Terrorism exclusions generally are written into contracts of those who travel to places where terrorist acts are common. They typically do not apply when the insured is in the United States. 4. What types of policies were in force on the victims? The victims were covered by the same kinds of policies all Americans use: both individual and group policies. Individual policies typically are obtained by people on their own. They contact a life insurance agent and obtain coverage to protect loved ones. Group coverage typically is obtained as part of an employee’s benefits package. Many employers provide coverage with death benefit protection equal to a worker’s salary or twice their salary. 5. How much will these terrorist acts cost the life insurance industry? It is too early to tell, and it would be inappropriate to estimate. Still, the life insurance industry recognizes that the tragedy will result in a large volume of claims. 6. Is the life insurance industry financially capable of honoring all the claims it will get? Yes. The U.S. life insurance industry is financially strong, with $3.1 trillion in assets and liquid reserves ready to respond to this tragedy. We have very strong solvency regulation in this country, and our regulators require that we set aside reserves adequate to meet unexpectedly large volumes of claims arising from catastrophic events. Life insurers help people in time of need. This is a time of need, and the industry is prepared to do its job. Also, because a large number of companies insured the victims, the financial costs associated with this tragedy will be shared by many companies, minimizing the financial impact on any one company. To put the life insurance industry’s exposure from the September 11 terrorist attacks into perspective: in the year 2000, the life insurance industry paid a total of $44.1 billion dollars in death benefits on 3.8 million life insurance policies. Put another way: on average, the life insurance industry paid death benefits on nearly 10,500 life policy claims every day last year. 7. Will the tragedy result in any changes in life insurance underwriting? Probably not. Life insurers prepare, and help their customers, for the unexpected, The events of September 11 help explain why people obtain life insurance coverage. It shows that underwriting practices in force today are appropriate. 8. Will the tragedy result in an increased cost in life insurance? Not likely. While it is impossible to predict the marketing decisions of any company, the competitive pressures that have driven down the cost of life insurance coverage remain in place. 9. What procedures are in place to ensure beneficiaries receive their due payments? Life insurance companies typically pay claims on insured lives upon receipt of a death certificate on the insured. These procedures will generally apply in connection with claims resulting from the terrorist acts. However, the life insurance industry is keenly aware of the special circumstances faced by many of its policyholders and is committed to assisting the beneficiaries of the insured victims as expeditiously as possible. The American Council of Life Insurers is a Washington, D.C.-based trade
association. Its more than 400 member companies offer life insurance, annuities,
pensions, long-term care insurance, disability income insurance and other
retirement and financial protection products. Contact: Jack Dolan, American Council of Life Insurers =========================================================
For many of our subscribers, deliveries are still being made into and out of the United States. To get update information about border wait times, Canada Customs and Revenue Agency have created a very helpful site that is updated every two to four hours. Click here http://www.ccra-adrc.gc.ca/customs/general/times/menu-e.html
for the most recent update of border crossing times. Also, for private and corporate aircraft and
private boating subscribers, be aware that alternative reporting methods for
Customs clearance have been cancelled. Click
here for details on these cancellations: http://www.ccra-adrc.gc.ca/customs/individuals/canpass/canpass-e.html
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