How to Prepare Your Business for U.S. Expansion DRIVING … · 2017-07-06 · How to Prepare Your...

Fall 2013

CROSSING BORDERS How to Prepare Your Business for U.S. Expansion

DRIVING GROWTHTransX Becomes Industry Giant by Helping Their Customers Grow

WHEN DISASTER HITSHow Well Does Your IT Disaster Recovery Program Measure Up?

W H E R E V E R B U S I N E S S T A K E S Y O U

Spring 2015

After 26 years of serving Private Enterprise clients, John Hughes is as excited about working with business owners as he was when he first started. “Working with entrepreneurs has inspired me—the variety of Canadian businesses, the success and eagerness is infectious,” John, originally from Ireland, says.

John knows a little about business success himself. Having co-authored two best-selling books, Building the Best (2006) and Power of the Best (2012), John has communicated his strategic insights widely, and says he has his clients to thank.

“Working with successful business people has inspired and informed me and made me an entrepreneur myself,” says John. His professional aspirations led him to MNP, where he took on role of National Leader for MNP’s Private Enterprise practice in November of 2014. With extensive consulting experience in auditing, strategic tax planning, strategy and operational consultancy, corporate finance and due diligence, John adds additional value to MNP’s client-focused, full-service approach.

“What attracted me to MNP is the focus on the mid-market and private companies. It’s the fastest growing firm in Canada and they’ve done such a terrific job building their business while supporting their clients. Expanding to capture other larger mid-market companies is interesting and I’m fortunate to spend my time working with them and learning about them,” he explains.

John applauds the firm’s ability to do successful mergers as well as bring in new professionals to support its growth and investment in new services. And John, the former National Leader of Deloitte’s Private Enterprise practice, has a nose for success; having led Canada’s Best Managed Companies program, which recognizes excellence in Canadian owned and managed companies with revenues over $10 million.

MNP and John share a commitment to on-going client relationships. “When I started out, I worked with a gentleman whose wife and daughter were in our first meeting. In that moment, I realized that my role was assisting individuals in reaching their goals, and their dreams for their families. MNP understands that too; we’re all here to make people more successful.”

Published by:MNP LLP#800, 715 5th Ave SWCalgary, AB T2P 2X6P: 1.877.500.0792

Managing Editor:Debra BeckT: 250.863.5968E: [email protected]

Associate Editor:Dina O’Meara

Articles in this publication are neither official statements of position, nor should they be considered technical advice for individuals or organizations without consulting an advisor.

PARTNERS IN PROFILE

John Hughes MBA, CPA, CA

National Leader, MNP’s Private Enterprise Practice

3 TAXATIONA Taxing ExperienceMaking Sense of International Tax Planning in Today’s Environment

4 PRIVATE ENTERPRISEBusiness Success Contingent on Having A Good Contingency Plan

CLIENT PROFILE Driving GrowthWinnipeg-based TransX may have started small, but they’ve become an industry giant by finding solutions to help their customers grow.

8 MANGEMENT CONSULTINGInfrastructure SolutionsWhether you’re a business owner, government or First Nation, here are some things to consider when you need to build or maintain assets.

10 ASSURANCECrossing BordersHow to Prepare Your Business for U.S. Expansion

12 CORPORATE FINANCEUnderstanding the Value of Your Valuation

14 ENTERPRISE RISKWhen Disaster HitsHow Well Does Your IT Disaster Recovery Program Measure Up?

6COVER STORY

SPRING 2015

2 MPACT › Spring 2015

Making Sense of International Tax

Planning in Today’s Environment

International Tax Planning and BEPSThese same globalization trends have put more pressure on governments and the international community in general to develop and enforce consistent international principles which govern tax planning for companies doing business in multiple jurisdictions. We have seen increased attention in Canadian as well as international media around “controversial” or “aggressive” tax planning resulting in some businesses or individuals benefitting from lower effective tax rates.

International action against Base Erosion and Profit Shifting (BEPS), led by the Organization for Economic Co-operation and Development (OECD), is blurring the line between legal tax avoidance and illegal tax evasion and affecting business of all sizes, says Loren Kroeker, CA, Senior Vice President of MNP’s Taxation Services practice.

“Tax is not a morality issue, it’s a legal issue,” Loren explains. “The language coming out there is around fair share. We in the tax community loudly object to this language because nobody can run their business around something as nebulous as ‘fair share’.”

“Businesses face being taken to court for following legal tax practices without

The ability to minimize taxes paid within the rules and spirit of the law is a well-established principle which governs and forms the basis of all tax planning today.

Small and medium Canadian businesses have benefited greatly from the rapid globalization of the world economy and the pervasiveness of technology-based business. This has enabled them to expand by growing their business internationally early on in their business’ life cycle and thereby benefit from international tax planning to a greater degree than ever before.

A TAXING EXPERIENCE

clarification of the international agenda,” he notes. The bigger issue for Canadian businesses is without competitive tax rates to draw on, they risk having less after-tax earnings to reinvest.

In reality, the BEPS proposals are not designed to tell countries what tax rates they should charge or how they should administer their tax systems. Taxation is a major fiscal and economic policy tool of many countries and should remain so. BEPS is, however, creating a more robust set of rules and guidelines that should assist countries in protecting their tax base and enforcing their laws relating to the taxation of foreign source income. BEPS is designed to better tie taxation in a jurisdiction to the level of business activity carried out in that jurisdiction. The days of simply setting up a company in an offshore jurisdiction with no or low tax and moving profits to that company with little or no substance are gone.

In September 2014, the OECD issued the first seven of 15 recommendations to level the playing field and “restore fairness and common sense to the international tax system.”

“The work therefore is about aligning taxation with economic activities and value creation, rather than about increasing overall tax burden,” the organization said.

International Tax Planning for your Business“This is a great time for small- and medium-sized businesses in Canada. With globalization and the relative small size of the Canadian market, Canadian businesses can expand internationally very quickly and with great success and Canada’s system of taxation is designed to help such businesses grow,” says Tim Bloos, an International Tax Partner with MNP based out of Toronto.

International tax planning currently is about minimizing a business’ exposure to taxation in foreign jurisdictions by planning the way that business is conducted in those jurisdictions. It is also about creating tax-effective structures that minimize your tax and compliance costs when expanding your business internationally.

“BEPS will clarify the rules and make the international system for tax administration more transparent, which is a good thing, but it will also complicate things and necessitate consulting with your tax professional to keep apace of developments,” says Tim. “Your MNP specialist can direct you through this evolving system of rules.”

TAXATION

For more information, contact your local MNP Advisor or Loren Kroeker at [email protected], or Tim Bloos at [email protected]

3


Canadians are well-versed in preparing for unpredictable weather, particularly during the spring when it can bring bitter cold temperatures as well as soft, sunny days. If only preparing for the fallout from unpredictable markets were as simple.

In less than a decade, Canadian businesses have weathered soaring energy prices, plunging oil prices, a global recession, a national recovery and another downturn, a currency too strong and then too weak – how can any business keep up?

Make sure your debt load is manageable, says David Yager, National Leader of MNP’s Oilfield Services group.

“The one thing that all the people that don’t make it have in common is they are overextended on their balance sheet,” David says. “They’ve got more debt than they can carry.”

Being able to pay off debt is the best weapon against market fluctuation, he says. Business owners have to evaluate their balance sheet risk when mulling possible growth, and ensure they can handle a slump in sales before taking a financial leap.

“As you manage your company, you have to have both the fiscal flexibility to exploit opportunities and the fiscal management to survive a downturn,” David explains.

Winners and Losers Since oil prices fell by more than 50% from last summer, many in Canada mentally revisited the global recession of 2008-2010. As a resource-based economy—revenues from oil exports exceeded manufacturing for the first time in 2014—Canada is particularly sensitive to commodity price fluctuations.

But David is quick to point out not all businesses suffer when oil and gas prices fall. After the price of natural gas collapsed in 2013, oil sands operators, which use heat to separate oil from the sands, got a boost because it lowered their input costs. Fertilizer producers, who use by-products of natural gas production, such as nitrogen and sulphur, also benefited.

“When oil prices go down, despite what industry may say, there are winners and losers,” David, an oilpatch veteran himself, says. One clear winner is the driver at the gasoline pump; lower gas prices mean more disposable income, which when spent, supports the overall economy. David notes high oil prices inevitably lead to a recession, the last happening when oil rocketed to US$145 a barrel from US$30 in less than five years.

Oil Glut Tipping Market ScalesThis time around, oil prices didn’t fall because of a global economic slowdown, say analysts. Commodity prices dropped on a combination of oversupply and political nose-out-of-joint syndrome. The Organization of Petroleum Exporting Countries’ (OPEC) head producer, Saudi Arabia, declined to reduce its oil output (which boasts some of the lowest production costs in the world) because it can still make a profit at $40 a barrel.

Plus, the power OPEC has welded over the global oil market since the 1970s when the cartel represented almost 50% of world oil is being threatened by the U.S. With nine million barrels per day now coming out of North Dakota, South Texas and other basins, the U.S. is rapidly displacing OPEC oil in North America, forcing OPEC producers to find new markets. OPEC claims 42% of total world production, according to the U.S. Energy Information Agency.

BUSINESS SUCCESS CONTINGENT ON HAVING A GOOD CONTINGENCY PLAN


5

It’s Not a RecessionAnother difference between now and 2008 is a current glut of oil in North America is pulling down prices, rather than a steep decline in demand, adds MNP Economist Shweta Kamdar. “There is a large volume of crude production now coming from the United States,” Shweta says.

Innovative uses of technology unlocked oil reserves from so-called tight shale formations, increasing U.S. crude production by an astounding four million barrels a day since 2010. “Few people anticipated this magnitude of change in a relatively short period of time,” she explains.

A Weaker Canadian Dollar Has its Good PointsSince the Canadian dollar is viewed as a petrodollar, the loonie has dropped in value almost in tandem with crude oil. If you are a tourist going across the border, that soft exchange rate will hit your pocket – and travel plans – hard.

But for businesses involved in exports, the lower loonie (which at one point was trading above the U.S. greenback) is a competitive bonus as your cost side is lower than the market you sell into. Businesses that are energy-intensive, such as farming, mining and forestry, and transportation may benefit from lower energy prices as they represent a substantial percentage of their overall costs.

However, a prolonged period of low oil prices is likely to result in reduced provincial revenues from oil royalties, which may affect the ability of energy-rich provinces to meet their budget goals, cautions Ed Mansfield, Ph.D, Leader of MNP’s Economics and Research practice. “The recent low prices may affect the provinces’ fiscal situation and their ability to borrow capital to fund projects. Discretionary spending may be reduced,” he says of Newfoundland and Labrador, Alberta and Saskatchewan.

PRIVATE ENTERPRISE

For more information, contact your local MNP Advisor or David Yager at [email protected], Shweta Kamdar at [email protected], or Ed Mansfield at [email protected]

For public and private business owners alike, David suggests four key steps to keep from dancing to the market’s tune.

1Don’t overextend yourself. As you borrow to expand, make sure to stress test your balance sheet so if there is a reduction in

revenue, you can adapt your business to keep your lender happy. “The lender likely doesn’t want to take over your business, but what they will do is load you up with extra fees,” he says. “They will put on extra charges and increase interest rates, just at the time you can afford them the least.”

2Customer concentration is a real risk. If you are only building widgets for one company and that company closes

the plant, you’re at high risk. “If you have too high a concentration with one customer and something happens with that customer, nothing but misery will follow,” David explains.

3Plan for management continuity. If you are a small business owner, the plan might mean a big insurance policy. For

a larger operation, you should be training someone to take over and have liability insurance as well. If something goes wrong on a job and you are underinsured, that can be devastating for a company.

4Back up your data. The thing that not enough people think about is IT, David says. “You have to be backing up your

data. That’s not necessarily related to the price of oil, but if you’re not backing up your data and everything is electronic, and something happens to your computers, you can certainly wind up in quite a pickle.”

5

Every company strives for growth; it’s the name of the game if you’re going to be successful over the long term. For Canada’s largest privately owned transportation and logistics company, growth has been critical, both to keep up with rising fuel costs and meet the needs of its customers, who are constantly growing themselves. For the TransX Group of Companies (TransX), that has meant focusing on being flexible and innovative, a strategy that has paid off.

TransX got its start in 1963 as a small trucking business hauling freight between Virden and Winnipeg in Manitoba. Today the company has 3,000 employees,

about 3,500 customers and makes around 72,000 shipments per month. With annual revenues of more than $500 million, it’s also one of the top 60 carriers in North America.

“Our philosophy is very simple,” says Louie Tolaini, President and Founder, from his office in Winnipeg. “We want to make a little money for a long time, so we focus on providing good service and being partners with our customers. Their needs for capacity and diversity evolve as they grow, and as their partner we adapt to meet those needs.”

TransX has customers of all sizes across North America, including a number of Fortune 500 companies. They’ll make sure one pallet gets where you need it to go or can manage your entire logistics system. Offering everything from temperature-controlled shipping to flat deck, LTL (less-than-truckload) and truckload, the company has one of the most comprehensive suites of services in the industry and specializes in crafting custom solutions.

And that’s exactly what their customers need from them. As companies consolidate and their business changes,

DRIVING GROWTHWinnipeg-based TransX may have started small, but they’ve become an industry giant by finding solutions to help their customers grow.


CLIENT PROFILE

they rely on TransX for everything from new customized solutions to more efficient shipping.

“One of our main strengths is that we are able to offer them a lot of different types of services,” says James Zacharias, VP, Revenue Accounting at TransX. “Instead of working with a lot of different carriers, they have a multidimensional transportation provider to support them.”

As an example of how the partnership with customers works, Louie explains his team realized many customers would benefit by switching from shipping over the road

to intermodal shipping. They took that information straight to their customers.

“It saves them money,” says Louie. “But there is also the green aspect, with fewer trucks on the road, less fuel being used and less carbon dioxide being produced. We’ve been quite successful at promoting that change, which has benefited them and TransX.”

With the cost of fuel constantly changing, it’s also important for TransX to stay on top of cutting-edge solutions that can increase efficiencies and reduce costs. Over the years, that’s required significant investment in research and development as well as in technology.

One such project is the in-house development of a new operating system and of software applications. The three-year project will improve visibility for TransX and its customers, and create efficiencies in handling freight. Three of the company’s divisions are using the new IT system and the rest will be transferred to the system over the next year.

To help mitigate the costs of research and development (R&D) and innovation, TransX turns to MNP. “Their staff is very knowledgeable with respect to R&D programs within the Canada Revenue Agency,” says James. “They’ve guided us through several Scientific Research and Experimental Development (SR&ED) applications that have resulted in tax advantages for us. We were aware that we could get the SR&ED credit but they opened our eyes to the process and other opportunities.”

Interestingly, TransX is one of MNP’s longest-standing clients. In fact, they’ve been working together since the transportation company was launched 51 years ago.

When asked why he initially chose MNP, Louie laughs. “I didn’t have any choice! They were the only firm in Virden at the time.” But as TransX grew, so did MNP, and

Louie continued to find that the firm could meet his business needs.

Rob MacDonald, FCA, Assurance Partner with MNP in Winnipeg, has been working with TransX since 1992. He explains that it’s clients like TransX that drive the firm to add new services and talent. “They had just started operations in the U.S., as far as having a facility there, when I started working with them,” says Rob. “That meant we had to strengthen our ability to help them with U.S. tax and cross-border transactions. A lot of the tax strategy work we’ve done for them has been driven by their growth.”

James, who’s been with TransX for 27 years, says there is a lot of value in having such a long relationship. Working with people who have a good understanding of the company and of the challenges specific to the transportation industry results in stronger, more meaningful advice.

“Rob’s client-first approach and strong assurance knowledge and tax planning advice has helped us with financial planning and given us solutions that made a lasting difference to our accounting and operations. He and his fellow partners involved in the account have been a great fit for us,” says James.

Going forward, TransX remains focused on growth, although Louie notes that it is harder today than in the past. They’re looking to grow by acquisition if the right opportunity presents itself, as well as organically. And as the world moves faster and faster, they’ll continue to focus on anticipating and meeting the ever-changing needs of their customer partners.

Rob says MNP will do the same for TransX. “They are one of the longest-standing clients we have and we appreciate that,” he says. “We both started small and we look forward to continuing to grow together.”

Left to Right: MNP’s Rob MacDonald, with Louie Tolaini and James Zacharias of TransX.

7

Infrastructure Solutions

“We had a client that wanted to build an $80- to $120-million high-rise commercial project that involved various revenue streams. In that kind of situation, it’s worth digging deeper to make sure your market analysis and the average revenue streams are realistic,” says Ian, illustrating the importance of feasibility work.

Ian adds you also want to ensure you understand the details of the capital costs of your project, including analyzing the variability of individual costs, such as those for labour or steel and how that might affect profitability and risk.

Discovering that a project isn’t financially feasible doesn’t mean you have to give up on it. More often, changes can be made to adjust to the financial reality. “It does happen that projects don’t proceed,” says Ian. “But the client saves millions of dollars by not going down a road that didn’t have enough opportunity.”

HOW WILL YOU GET IT BUILT?After determining feasibility, the next step is to secure funding. “For most large capital projects, the client needs a business case to demonstrate whether the project will be a financially sustainable asset. In addition to estimating the operating revenues, you need to model out the capital costs and the flow of revenue to offset the capital and operating costs,” says David Woodman, MBA, a Certified Engineering Technologist and a Managing Partner of MNP’s Consulting Services practice in Alberta.

David recently worked with the Lubicon Lake Band and the Alberta government to create a business case for a trio of significant infrastructure projects. That involved a detailed analysis of needs, developing a vision for what the band wanted and preparing a project plan and

IS IT WORTH IT? There are four phases in the lifecycle of a capital project: conceptual planning, acquiring funding, detailed planning and execution. What happens in each phase will affect the outcome, but getting the first one right can make a huge difference, helping you prioritize projects and allowing you to prove investing in a specific project makes sense.

“There’s good value in getting objective external advice on projects because emotional involvement can impair the ability to make a good decision,” says Ian Craven, CMA, CMC, a Partner with MNP’s Consulting Services practice in Winnipeg. Ian has helped public sector and First Nation clients, as well as private businesses determine the feasibility of going through with a large capital project, providing in-depth financial analysis as well as statistical analysis on the assumptions.

Whether you’re a business owner, government or First Nation, here are some things to consider when you need to build or

maintain assets.

Large capital projects present numerous challenges. Should you build it? How will you fund it? Is it worth the investment? What needs to be done to make it last? Whether you’re in the private sector, the public sector or a First Nation, large capital projects are increasingly being scrutinized for value, transparency, fairness and efficiency, making decisions even harder. It’s important to ensure you have the information you need to make informed decisions early on so resources are used as effectively as possible and your capital project achieves your objectives.


cost estimate to present to the province for funding. Thanks to a well-written and defensible business case, project funding was obtained and the first phase of the project—establishing 19 new homes in the community—was completed .

While funding is often a significant challenge, securing it doesn’t mean the hurdles are over. Most organizations and First Nation communities don’t undertake big capital builds every day and don’t have in-house expertise to see the project through to completion.

“We’re often asked to stay involved because we have that upfront understanding of the objectives of the project and how all the pieces fit together,” says David, adding MNP did stay on with the Lubicon Lake Band as project manager and contract administrator. “We have a solid understanding of the business, economic and social outcomes the project is intended to achieve, allowing us to represent the interests of the client right through to the commissioning of the asset being built,” he says.

DECISIONS, DECISIONSAcross Canada, governments at all levels are struggling with prioritizing infrastructure investments. Decisions have to be made about what they need to build to keep up with population growth, as well as where and what to invest in to maintain aging infrastructure.

“This is a mounting problem and it gets worse every year,” says Jason Ducharme, MScPl, a Managing Partner of MNP’s Public Sector Services practice in Ontario. “But there are really good solutions for managing this, both in terms of what you should spend on and innovative ways of financing new infrastructure.”

Jason offers the example of SaskBuilds, an organization that needed to prioritize infrastructure spending in Saskatchewan. Faced with tough decisions, they turned to MNP.

After interviews to determine how things were being done and research into global best practices, Jason and his team gave SaskBuilds a capital planning framework tailored to their unique situation. The framework provides a guideline for measuring the condition of assets, estimating demand for new facilities and deciding where to invest.

A FINAL WORDWhether you’re planning one project or trying to figure out how to handle multiple new or aging projects, remember to take all aspects of capital planning and asset management into account. Finance, real estate development, organizational design and process and risk management are just some of the issues you may have to consider. Having an objective third party provide advice and expertise early in the process can help ensure your success.

MANAGEMENT CONSULTING

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Breaking Out of the BoxNot having much luck with traditional sources of funding? Talking to your business advisor may result in innovative solutions. As an example, Jason Ducharme is helping Metrolinx in Toronto do a Land Value Capture to partly finance a subway line extension.

“The theory is that when you build a new subway the land and building values go up,” Jason explains. “We’re helping devise agreements with landowners, developers and builders in that area to extract a portion of that value increase to help pay for the station and the new transportation. That way you’re not just relying on tax dollars.”

For more information, contact your local MNP Advisor or Ian Craven at [email protected], David Woodman at [email protected], or Jason Ducharme at [email protected]

9


Understanding the U.S. /Canada Differences“I’ve come across business owners who were attracted by business opportunities arising from the U.S. recession and were about to expand across the border but hadn’t considered differences, such as U.S. accounting and tax rules, privacy legislation and reporting requirements. Clients who work with a business advisor reduce their risks and set themselves up for success,” says Annette Kuckartz, CA, Partner with MNP’s Audit Services practice in Saskatoon.

The challenges you face when expanding into U.S. markets are many. Understanding the country and state-specific rules and regulations and gaining familiarity with the industry practices in the area are key considerations. Learning how to manage risk across the border, and discovering the implications on your Canadian business are just first steps. Understanding how to position the U.S. operation in the most tax-advantageous environment, and complying with reporting requirements are more.

Take Your TimeFor motivated companies who sense an opportunity, like a competitor facing financial duress open to a buyout, or a change in the winds of the market, the temptation of quick expansion might be hard to resist. “Many entrepreneurs focus entirely on the end game at the expense of

For businesses operating in a global economy, the desire to expand into U.S. markets to maximize profit can be strong. But jumping into unfamiliar waters without understanding the tax and accounting implications can spell disaster for your business across the border and at home.

the other things they need to do. Having the right business advisors, keeping the right financial records and making sure you’re compliant are necessary components to a successful expansion,” explains Will Avery, CPA, CA, CPA (NY), a Partner with MNP’s Public Companies group in Toronto.

Not involving your business advisors, who are aware of filing obligations, in the formalization of underlying documents can sink your expansion, says Will, who advises companies looking to go public in the U.S. and Canada. “We’ve seen companies approve and issue instruments like stock options, convertible debt, warrants and shares, without formal corporate paper backing that up. If these instruments have not been formally ratified then they don’t legally exist and lawyers have to work with stakeholders to correct what should have been done right in the first place. That shatters the confidence of stakeholders and causes unnecessary delays,” he cautions.

Will and Annette’s advice: be prepared to take it slower than you might like. For some companies, a quick process can take anywhere from three to six months. The process is slowed down further if business owners jump the gun in any way, and companies have a difficult time staying afloat in foreign markets if they don’t start strong.

Do Your Homework“I worked with a Canadian public company looking for expansion into the U.S., mainly for financing,” says Will. Eager to move forward, they hadn’t prepared and wound up in an intensive auditing process before they were able to seek financing across the border.

“In one sense they were lucky—they didn’t have a terribly long corporate history to cause them a problem, but it took time to align with U.S. Generally Accepted Accounting Principles (GAAP) reporting. That process took the wind out of their sails a little.” The window can close very quickly when it comes to opportunities for financing and support. Especially in the technology sector things move quickly, so prospects and opportunities can be lost because of seemingly minor omissions from the process.

Focusing on MNP’s larger and more complex clients, Annette works with many going through growth who aren’t content to continue in one market or country when opportunities to learn and expand exist elsewhere. “I’ve had clients incorporate a subsidiary in another country without fully understanding the tax environment,” she says. The tax implications and potential consequences of owning a subsidiary in another country have to be examined, while ensuring alignment with the corporate strategic plan.

CROSSINGHOW TO PREPARE YOUR BUSINESS FOR U.S. EXPANSION

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MNP’s International Connection When entering the U.S., your MNP advisor works with Praxity LLP—MNP’s global alliance, which consists of independent accountancy, tax and business consulting firms that work together to provide value-added services.

“MNP’s relationship with Praxity provides local experts in both countries working together seamlessly,” says Will. “The collaboration between firms who share the same client-service values and qualifications means clients have on-site and time-zone appropriate service from advisors with local expertise. “

If you’re considering expansion or made the move on your own, it’s important to work with a business advisor to help navigate the differences in Canadian and U.S. tax and accounting processes. Failure to identify differences in the more complex areas can cause unexpected amounts of work, increase costs and anxiety, and potentially derail an otherwise successful company.

“We work to serve our clients both domestically and internationally, but engaging in dialogue throughout the process is a necessity. We focus on the compliance aspects which allow you to focus on the operations enabling you to reach your goals wherever you do business,” says Annette.

Differences MatterThere are extensive differences in accounting and tax standards between Canada and the U.S. Here are just a few:

Financial Reporting Standards: Financial reporting requirements for most U.S. entities are outlined in the Accounting Standards Codification, which references standards set by the FASB, the AICPA and the SEC. In Canada, public companies follow International Financial Reporting Standards (IFRS), while other entities report under Accounting Standards for Private Enterprises (ASPE), Public Sector Accounting Standards (PSAS), and standards for Not-for-Profit Organizations and Pension Plans.

Sarbanes-Oxley (SOX): U.S. companies with a public float of >$75M at the most recently completed second quarter must have an audit of internal controls over financial reporting in compliance with SOX. This is not required in Canada.

Quarterly filings: U.S. filings require auditor involvement. This is not required in Canada.

Differences in Reporting Deadlines:

Canada - Venture issuers have 60 days to file the interim financial statements and 120 days to file the annual financial standards report; non-venture have 45 and 90 days.

U.S. - Also depends on classification:

Large Accelerated - 60 days annual and 40 days for interim reports

Accelerated - 75 and 40 days

Non-Accelerated - 90 and 45 days

For more information, contact your local MNP Advisor or Annette Kuckartz at [email protected], or Will Avery at [email protected]

B O R D E R S

ASSURANCE


UNDERSTANDINGTHE

VALUE OF

YOUR VALUATION

When Do You Need a Valuation?Valuation opinions are used when the value of a business is needed for something like divorce settlements, an estate freeze or tax planning. In other situations, valuations are done on a regular basis to get up-to-date figures. “Take a company that has 30 shareholders, and one dies. They will need to value the company for the estate of the deceased person, and if the remaining shareholders want to buy out those shares, they need to know what they’re worth. Some companies do a valuation every two to three years to inform shareholders,” explains Michele Middlemore, CA, CBV, CFA, with MNP’s Corporate Finance group.

Most business owners who come to MNP for a business valuation have no intention of selling their businesses in the near future. They are interested in tax planning, succession planning, corporate reorganization, insurance coverage and assessing the value of intangible assets. The valuation provides support for other things they want to do, such as expansion or strategic planning. If a sale of the business is the objective, a valuation may not be necessary so it’s important to have a conversation with an M&A advisor to discuss your circumstances.

Using Assumptions Valuations are performed using a certain set of assumptions that help create a uniform standard of value upon which a comparison can be drawn. This is why the result can be a different value than the real market value.

“Assumptions—such as each party having perfect information; each party having equal negotiating power; that there are no special purchasers, such as those who may be willing to pay a premium for strategic reasons; 100% cash consideration—are used consistently so all businesses are valued in the same notional environment at an exact point in time,” Michele explains from her Toronto office.

Wondering what your business is worth is natural. But when is getting a business valuation really useful, and how closely related is your business valuation and the actual value of your business in the market?

Trevor Kawka, CA, CBV, CFA, a Partner in MNP’s Valuation and Litigation Support Services practice in Calgary, explains a valuation opinion is beneficial for business owners and stakeholders in multiple scenarios long before they go to market, if they ever do. The value arrived at is not, however, necessarily what you would receive if you sold the business.

“We work within a notional market—we determine the value of a business without putting it up for sale. That may result in a different price than you’d actually get because we can’t determine which buyers are out there, how motivated they are or how motivated the seller is,” says Trevor.

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CORPORATE FINANCE

engaged by clients who have been approached out of the blue by a potential purchaser. Often the number they’re given is meant to entice interest in the selling process but isn’t actually what the buyer is willing to pay.”

Doug adds that such clients are shocked by the valuation they receive because they’ve had a much higher number in their head. “At that point it’s important for us to be good communicators and good teachers so we can manage those expectations and support the client moving forward,” he says.

Understand the Valuation from the Buyer’s PerspectiveThe complexity of valuing mid-market and private businesses isn’t lost on advisors in MNP’s Corporate Finance area. Their job is to understand a company from a buyer’s perspective. Performance, the worth of tangible and intangible assets and even management techniques are all factored in. The complexity of operating systems, amount of goodwill in the business, and corporate memory dependency are analyzed to give owners an opportunity to evaluate their business methodology—from financing to management and everything in between. Before officially putting out the ‘for sale’ sign, businesses can then strategize to reduce risk and reinforce practices that drive value.

“The performance of the business itself, such as having a good track record, good management and sustainable growth, drives value. We know that for buyers, management is consistently important across the board and drives value because it decreases risk for buyers,” says Doug.

In the end, having a valuation gives you useful information that can be used for day-to-day operations as well as for strategically planning the future sale of your business. With up-to-date information and an understanding of how you can drive value and reduce risk in the future, you can make informed decisions today and better prepare to achieve the best possible outcome if you do go to market.

It’s ComplicatedMichele’s explanation highlights the complexity and the limitations of a valuation, which can be deemed accurate only if the assumptions hold and, in any event, at the point in time at which it is calculated. Valuations can’t be carried forward—by years or months—since any change related to the market or the business itself could affect the value. A business may expand or shrink, take on more debt or become more or less desirable in the market. A sale transaction can be structured in many different ways (i.e. share exchange, earn-out, deferred consideration, vendor take-back loans, etc.) all of which have different value implications.

“Markets fluctuate heavily for businesses depending on expectations of future performance and the supply and demand for the business,” says Trevor. “The key is recognizing when a valuation can assist you—such as during shareholder disputes or succession planning—and when it disadvantages you, like basing your purchasing offer on an old valuation. Due diligence is an important part of the purchasing process and having current information can protect you in a buy/sell situation.”

A valuation helps you discover what’s driving the value of the company. With that information, you can make decisions regarding your next moves, such as reducing risk in the business, so the value will rise in the years to come. MNP Chartered Business Valuators (CBV) show business owners how to mitigate risks, explain how the valuation estimate was determined and to what extent they control it.

When it’s Time to SellIf you are interested in selling your business, developing an understanding of the value drivers and the price that can be negotiated when preparing to go to market is key. “We find a lot of clients understand what their peers are trading for, and they’re experts in their industry, so that supports their knowledge base,” says Doug Bedard, MBA, Senior Vice President and Director of MNP’s Corporate Finance group in Calgary. “Still, we get

For more information, contact your local MNP Advisor or Trevor Kawka at [email protected], Doug Bedard at [email protected], or Michele Middlemore at [email protected]

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With day-to-day operations, it’s easy to let something as complex as information technology (IT) disaster recovery planning take a back seat as we work to drive our business forward. How many businesses for example, had a plan in place to deal with the scope of disruption caused by Alberta floods in 2013?

While it’s impossible to completely eliminate risk of disruption within your IT department, you can take critical steps to help mitigate the most potentially destructive impacts on your business. Leading practices demonstrate that an effective Disaster Recovery Program (DRP) will support an operation by ensuring required IT services can continue to function through a major disruption, according to the needs of a business. This support includes services such as systems, networks, applications, data repositories and telecommunications.

It’s a topic that Gustavo Meschler, IS Eng, CISA, PMP, CRMA, ABCP knows well. “As devices, systems, and networks become ever more complex, there are simply more things that can go wrong,” says Gustavo, an Enterprise Risk Services Partner with MNP. “As a direct consequence, recovery plans have also become more complex.”

An IT Disaster Recovery Program is more than just a plan, it is a documented policy and set of processes, scope, and standards which have been developed to help protect your businesses’ IT infrastructure should a disaster occur. A well-strategized DRP should outline specific actions to be taken before, during and after the event of a disaster.

Executive management commitment and accountability should be established to ensure program visibility. The IT Disaster Recovery Program is a process; as the business grows and systems change, the plans require updates, testing and maintenance. To ensure success, this requires sufficient buy-in and support across the organization. Value is often only recognized if the plans are deployed to respond and recover from an incident. Maintaining support can be a challenging task for many organizations to implement and sustain an effective IT Disaster Recovery Plan.

WHEN DISASTER HITS

How Well Does Your IT Disaster Recovery Program Measure Up?


Reasons Why Plans Fail

One of the primary reasons why Disaster Recovery Plans fail is the lack of testing. Your environment is complex; without regular validation and testing you cannot be assured the plan is accurate and in sufficient detail to support recovery efforts. Testing will also strengthen awareness and understanding to ensure your people are ready in the event of a disaster.

Furthermore, your technology environment is no doubt continually changing. From hardware deployments to changes in software updates and system configuration, the accuracy and completeness of critical information contained in your DRP needs to be updated. Testing is an important aspect to the maintenance of your plan.

Don’t Delay

Despite the number of very public disasters over the past 20 years, still only about 50% of companies report having a disaster recovery plan. Of those that do, nearly half have never tested their plan, which is the equivalent to not having one at all.

Without a plan in place, the fallout from a disaster could make it impossible for a business to return to normal operations. To highlight the importance of a DRP, Gustavo stated: “Losing invaluable business data could put a business in an incredibly indefensible position. With an increase in worldwide disasters that have left businesses struggling to recover, it is clear that a disaster recovery program is something businesses of all sizes should be taking very seriously and implementing before it’s too late.”

Developing a Plan

There are several critical components that must be carefully considered when developing an effective recovery program. These components include:

• Business Impact Analysis (BIA)A BIA quantifies the impact the loss of IT services would have on a business. This impact could include financial loss, operational disruption or damage to the reputation of your organization. A BIA will identify the most important services to your business and be a key factor as you develop a strategy that best protects the needs of your business.

During the business impact analysis, two key components are identified. These are the Recovery Time Objective (RTO) and the Recovery Point Objective (RPO). Gustavo explains the RTO represents the maximum amount of time your operation can be suspended before experiencing the consequences associated with a break in business continuity. The RPO represents the point in time in which data must be restored after an outage. The RPO is measured backwards in time from

the moment a disaster or failure occurs and can be specified in seconds, minutes, hours or days.

Meeting the expectations of the customers, the business and senior management is probably the main challenge in the implementation of the plan. Without performing a BIA, a gap between recovery capabilities and the recovery time frame expected by business units could exist.

• Risk Analysis (RA)This is a detailed assessment of the level of threat an organization may face under different disaster scenarios. The results of the BIA and RA will allow you to incorporate strategies that create an optimal balance of risk reduction and recovery options, as defined by leading practices.

• Documentation and Implementation of PlansYour disaster recovery plan should detail how to effectively and efficiently manage the execution of the plan, including the steps to restore processes and reduce the level of impact that a disaster could have on your organization.

The plan contains, at a minimum, the purpose and scope; roles and responsibilities; plan invocation; contact details; Disaster Recovery strategies; action plans / task lists; and resource requirements: people, premises, technology, information, and supplies.

• Exercising and TestingYou will want to exercise and test all disaster recovery procedures to ensure they are consistent with the objectives put in place to optimize the opportunity for protecting your IT infrastructure. Tests are based on appropriate scenarios that are well planned with clearly defined aims and objectives. Formalized post-exercise reports should be produced that contain outcomes, recommendations, and actions to implement improvements.

• Ongoing Operation and MaintenanceThis ensures all staff are trained and in complete understanding of the importance of implementing the DRP into their day-to-day operations. A regular review of the entire process should be undertaken to ensure your recovery plan remains current and effective.

ENTERPRISE RISK

For more information, contact your local MNP Advisor or Trac Bo at [email protected], or Gustavo Meschler at [email protected]

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MPACT is published two times a year by MNP LLP. It provides information that is general in nature.For guidance on your individual situation, we recommend you consult your local MNP professional.

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MNP ConsultingBetter Fit. Better Results.

Working with Canada’s most recognized organizations, Trent knows that the right fit is what makes things happen. Our clients place a high value on our ability to get fully immersed in their organization, and as one team, effectively and efficiently address their most challenging issues. The right fit starts with partner-led engagements and goes as far as you need to reach your goals, positioning you to do what you do best — even better.

For more information contact Trent Bester at 1.877.500.0778 or [email protected]

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