Tuesday, December 23, 2014

Questions for a Potential M&A Adviser: Commissions

Most mid-market business owners do not regularly go through mergers and acquisitions, so it is generally not something they are familiar with. But for many, selling their business will be the most significant financial transaction of their lives.

So for something so important, how do you pick an adviser?

There are no reliable sources of information that make it easy to compare M&A advisers when "shopping around." The process remains mysterious to a lot of people, and advisers will all run their deals a bit differently. So most of the time you will just have to speak directly with a potential adviser and ask them questions.

Choosing the right M&A adviser is a lot like choosing an accountant or a lawyer. You want to qualify them for their ability to align their expertise with your own needs and priorities. But while a business owner needs an accountant and a lawyer on a regular basis, an M&A adviser is a much more specialized professional who carries a proportionately larger responsibility because their work is more focused on a particular transaction.

One of the biggest questions that comes up when choosing an advisor is how the commissions work.

QUESTION: "What are the commissions charged on a business sold for less than $1 million? Over $1 million?"

Many advisors use some variation of the "Lehman formula," named after Lehman Bros., the ill-fated Wall Street investment bank that collapsed during the 2008 financial crisis. It was initially used to determine commission structures when underwriting stock issuances, but it has been popular in the M&A business.

The basic pattern of fees for the old Lehman formula was: 5% for the first million dollars of the transaction, 4% on the second million, 3% on the third, 2% on the fourth, and 1% on everything over $4 million.

However, this formula was originally devised in the 1970s and price inflation since then has been significant. For this reason, the modern day "Lehman formula" is actually the "double Lehman formula" -- so 10% on the first million, 8% on the second million, and so on, with 2% on everything over $4 million. This makes sense because nowadays the relative transaction values are larger than they were 40 years ago.

One might think that it would be optimal to structure commissions so that larger percentages are earned on additional millions instead of the first million. While this seems intuitive, it can lead to some weird and undesirable results. Imagine that you have signed up with an adviser to test the market for your business at a given valuation range. Now imagine that some exceptional macro-level event raises valuations in the entire industry. Should the adviser get a proportionally larger fee because of that? It seems unfair because they had no influence on what happened. But on the other hand, the adviser has no influence on whether the economy crashes or the business encounters some internal hindrance that puts downward pressure on its value. This would be unfair to the adviser, especially because doing a $10 million deal involves a similar amount of work as a $20 million deal. So a "Lehman formula" sort of structure can make sense for both the seller and adviser.

Another possibility is a straight linear percentage. So regardless of the final transaction value, the adviser would simply earn a flat percentage of the final transaction value in commission. Depending on deal size, this might be suitable.

That being said, it is important to note that whether the commission structure is linear or "Lehman"-style, they should come out reasonably close to one another on the total value of the deal if they are fairly calculated.

And practically speaking, there is not a "one size fits all" commission structure. Quite often, advisers will work with their clients to develop a specific agreement appropriate to the project.

Furthermore, our focus here is on middle market transactions. This will generally cover companies with revenues anywhere from $3 million to $100 million.

As you move up or down the revenue scale, the corresponding commission percentage changes. The investment banking division at a big bank like BMO or RBC might "only" earn 1.5% commission, but that could be on a transaction worth a few billion dollars (and most of these M&A deals are never completed anyway, because there are few potential buyers and the deals are especially complex). Regardless of the percentage, big investment banks and "Big 4" advisers (like E&Y or PwC) will usually want at least a million dollars in fees to take on a project.

At the lower end of the scale, where businesses sell for less than $1 million, business brokers will often want 10% to 12% on the transaction value. Additionally, business brokers frequently want to establish a minimum commission on a closed transaction (this is less common for M&A advisers and bankers, although it is something to watch out for).

Middle-market advisors like MAXIMA, working on transactions of size and complexity somewhere between big investment banks and business brokers, might have commission percentages somewhere between 5% to 10%. This depends a lot on the size of the deal and the challenges associated with it -- a bigger transaction typically entails a smaller commission percentage; an M&A deal projected to be especially challenging project might entail a larger percentage.


The above discussion should give you some ideas on how to talk about commissions with a potential adviser.

But that is just one part of the conversation.

In Part II, we will discuss M&A adviser work fees and retainers.

Closed Deal: Amik Oilfield Acquired by International Public Company

MAXIMA is pleased to announced that we recently closed an exciting international M&A deal. With our support, Amik Oilfield Equipment & Rentals Ltd. sold a majority equity position to a major multinational strategic buyer in the industry.

The primary goal of this engagement was to establish a strategic relationship that would support worldwide distribution of AMIK’s patented technology for oil production fields everywhere, including its artificial lift system, stuffing boxes, and wellhead drives.

This was a challenging deal but MAXIMA structured and negotiated a transaction that greatly exceeded our client's expectations.

As part of this transaction, MAXIMA provided services including:

  • Advising management around operational goals to achieve growth targets and strengthening financial reporting to properly represent the future opportunity to buyers;
  • Building a clear understanding of the AMIK business model to complete initial opportunity discussions without business owners present. This assisted in optimizing management’s time, efficiently qualifying the possibility for strategic fit, and protecting confidentiality;
  • Developing financial models to support the best transaction outcome;
  • Generating comprehensive business profiles and marketing documents to highlight the company’s strategic value to global market;
  • Market research to find optimal strategic buyers related to artificial lift opportunities;
  • Providing detailed analysis of competitive offers and proposed transaction models;
  • Leading the negotiations with several buyers simultaneously;
  • Managing the process and structuring for development of the Letter of Intent (LOI);
  • Providing complete oversight, support, and data management during the Due Diligence process with our secure Virtual Data Room.
  • Working closely with legal counsel to structure the Purchase and Sale Agreement so that the transaction building blocks agreed to within the LOI would be achieved;
  • Managing process and communications with Vendor, Buyer, Accounting, Tax, and Legal throughout life of project.
Congratulations to our client and the buyer on a successful close!

Wednesday, November 19, 2014

Year-End Tax Planning Tips

We are approaching the end of 2014 and our friends at KMSS have provided a helpful list of considerations for year-end tax planning in their recent newsletter.

This as a useful high-level summary of some issues business owners and high net worth individuals might want to start thinking about.

Obviously you shouldn't make any tax-related decisions just because you read something on the internet, so speak to your accountant or an advisor like KMSS to see if any of these ideas apply to you and your own tax situation.


On 2014 Remuneration:

Some general guidelines to follow in remunerating the owner of a Canadian-Controlled Private Corporation earning "active business income” include:

(1) There are generally two options for paying earnings out of a corporation – salaries and dividends. The best method depends on the applicable provincial tax rates, quantity of personal and corporate income, and whether you can afford to leave earnings in the company.

(2) Notification must be made to the shareholders when an “eligible dividend” is paid.

(3) Elect to pay out tax-free dividends from the “Capital Dividend Account”.

(4) Consider paying taxable dividends to obtain a refund from the “Refundable Dividend Tax on Hand” account.

(5) Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral (the tax is paid when cash is withdrawn from the company).

The effect on the “Qualified Small Business Corporation” status should be reviewed before selling the shares where large amounts of capital have accumulated.

(6) Dividend income, as opposed to a salary, will reduce an individual’s cumulative net investment loss balance thereby possibly providing greater access to the capital gain exemption.

(7) Excessive personal income may reduce receipts and credits, such as Old Age Security, the age credit, child tax benefits, and GST credits.

It may be advantageous to defer receiving Old Age Security receipts (for up to 60 months) if it would otherwise be eroded due to high income levels (greater than $71,592 for 2014).

(8) Salary payments require source deductions (such as CPP, EI and payroll taxes) to be remitted to CRA on a timely basis.

(9) Individuals that wish to contribute to the CPP or a RRSP may require a salary to create “earned income”.

RRSP contribution room increases by 18% of the previous year's “earned income” up to a yearly prescribed maximum ($24,270 for 2014; $24,930 for 2015).

(10) Spouses may jointly elect to have up to 50% of certain pension income reported by the other spouse.

(11) If you are providing services to a small number of clients through a corporation (which would otherwise be considered your employer), CRA could classify the Corporation as a Personal Service Business. There are significant negative tax implications of such a classification. In such scenarios, discuss risk and exposure minimization strategies with your professional advisor.

On 2014 year-end tax planning considerations:

(1) Certain expenditures made by individuals by December 31, 2014 will be eligible for 2014 tax deductions or credits including: moving expenses, child care expenses, charitable donations, political contributions, medical expenses, alimony, eligible employment expenses, union, professional, or like dues, carrying charges and interest expenses, certain public transit amounts, and children’s fitness and arts amounts.

Ensure you keep all receipts that may relate to these expenses.

(2) You have until Monday March 2, 2015 to make tax deductible Registered Retirement Savings Plan (RRSP) contributions for the 2014 year. Consider the higher income earning individual contributing to their spouse's RRSP via a “spousal RRSP” for greater tax savings.

(3) The age limit for maturing Registered Pension Plans, RRSP, and Deferred Profit Sharing Plans is 71 years of age.

(4) If you own a business or rental property, consider paying a reasonable salary to family members for services rendered. Examples include website maintenance, administrative support, and janitorial services.

(5) A senior whose 2014 net income exceeds $71,592 will lose all, or part, of their Old Age Security. Senior citizens will also begin to lose their age credit if their net income exceeds $34,873.

(6) Consider purchasing assets eligible for capital cost allowance before the year-end. A half year of depreciation deduction is allowed for most assets even if it was purchased just before the year-end.

(7) Consider selling capital properties with an underlying capital loss prior to the year-end if you had taxable capital gains in the year, or any of the preceding three years. This capital loss may be offset against capital gains in the current year, and then in the three preceding years.

(8) Registered Education Savings Plan (RESP) – A Canada Education Savings Grant for RESP contributions will be permitted equal to 20% of annual contributions for children (maximum $500 per child per year). In addition you may be eligible to receive a Canada Learning Bond which provides $525 in the first year, and an additional $100 each year until the child turns 15.

(9) A refund of Employment Insurance paid for certain non-arm’s length employees may be available upon application to the CRA.

(10) Taxpayers that receive “eligible dividends” from private and public corporations may have a significantly lower tax rate on the dividends as compared to non-eligible dividends. Notification to the shareholder is required.

(11) A Registered Disability Savings Plan may be established for a person who is under the age of 60 and eligible for the Disability Tax Credit. Non-deductible contributions to a lifetime maximum of $200,000 are permitted. Grants, Bonds and investment income earned in the plan are included in the beneficiary’s income when paid out of the RDSP.

(12) If required income, forms, or elections have not been reported to the CRA in the past, a Voluntary Disclosure to the CRA may be available to avoid penalties.

(13) For individuals who have not yet claimed charitable donations, consider making a donation of up to $1,000 in order to get a “super charged” donation credit. For these individuals with total donations of less than $1,000 in the current year, consider not claiming the donation amount until you have donated a total of $1,000 (can wait up to five years to claim the credit).

(14) Consider restructuring your investment portfolio to convert non-deductible interest into deductible interest. It may also be possible to convert personal interest expense, such as interest on a house mortgage or personal vehicle, into deductible interest.

(15) Are you a US Resident, Citizen or Green Card Holder? Consider US filing obligations with regards to income and financial asset holdings. Filing obligations may also apply if you were born in the US.

(16) Do you have foreign property or investments? Consider the filing obligations in both the foreign country and Canada.

(17) An investment tax credit is available in respect of each eligible apprentice. Also, a $1,000 Incentive Grant per year is available for the first and second year as apprentices. A $2,000 Apprenticeship Completion Grant may also be available. Provincial credits may also be available.

(18) Canada Pension Plan (CPP) receipts may be split between spouses aged 65 or over. Also, it may be advantageous to apply to receive CPP early (age 60 - 65) or late (age 65 - 70).

(19) Individuals 18 years of age and older may deposit up to $5,500 into a Tax-Free Savings Account in 2014. Commencing in 2009, annual contributions were limited to $5,000, though increased to $5,500 in 2013, for a total of $36,500 by January 2015.


Thanks to KMSS for this helpful overview. 

Wednesday, October 29, 2014

10 Things That Make Your Business More Valuable Than Others in the Same Industry

The industry your business is in will usually establish a range of valuation multiples that your business might sell for. Whether you are at the high end or the low end of that range depends not so much on what you do, but how you do it.

Some industries are “hotter” than others. If you watch the financial news media these days, you see trendy software companies generally earn higher valuations than printing companies.

So the industry your business is in will influence its valuation.

But an industry is not just a big blob of homogenous companies. All the businesses within an industry differ in numerous ways, big and small, from their basic financial profile to their special intangible assets. When we analyze businesses in the same industry, we find major differences in valuation and selling potential.

Certain patterns emerge from this analysis, leading to common themes in the businesses that secure the highest valuations when the time comes to sell.

There are 10 big things that will make your company more valuable than its industry peer group.

1. Recurring Revenue

The more repeatable revenue you have, the more valuable your business will be to a buyer. You want customers to have to repurchase regularly.

In an ideal world, your business would have all its customers on contracts with regular payments for defined terms, like when a telecom company provides you with a fancy new phone and locks you in for a two-year full service contract. Almost as valuable as a defined contract are auto-renewal subscriptions, like a cloud file storage service that just bills every month you until you tell it to stop. It’s almost as good when you can have customers make an “investment” to do business with you – like Bloomberg terminals.

It’s true that subscriptions are not appropriate for all industries, but if you can develop some form of recurring revenue your business will be tend to be more valuable than your competitors.

Lower on the scale of recurring revenue is consumable products or services that customers need regularly, but don’t necessarily need to get it from you all the time. A sunk money consumable is slightly better – the classic example is Gillette razor blades, where you first buy the handle, then you need to stock up on the replaceable razor blades at fairly regular intervals.

Avoid purely project-based consulting or product and services that are sold on an entirely one-off basis.

2. Something Different

Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to knockoff are more valuable than a company that sells the same commodity as everyone else in their industry. Intellectual property can be very valuable and a business with patented technology is appealing to buyers.

3. Growth

If your company is growing at 20% per year, that might sound pretty good… unless the industry as a whole is also growing at 20% per year. But what if you are growing by 50% each year, while the industry in general shows only 20% growth? Then your business is much more interesting.

Acquirers looking to fuel their top line revenue growth through acquisition will pay a premium for a business that is growing much faster than its peers.

4. Caché

Most strategic acquisitions are completed by companies between five to 20 times larger than their targets. Bigger companies can become a bit old and tired, and so they will often try to buy “sex appeal” through the acquisition of a “hot” young company in their industry.  If you are the darling of your industry trade media, you are more likely to get a premium acquisition offer. 

5. Location

Imagine an oceanfront restaurant on a strip of beach where the city has stopped granting new licenses to operate. Or imagine your business does oilfield facility construction and its field offices are located within 100 km of several newly announced major projects.

If you have a great location with natural physical characteristics that are difficult to replicate, you’ll have buyers who understand your industry interested in your location as well as your business.

6. Diversity

Acquirers pay a premium for companies that naturally hedge the loss of a single customer. Ensure no customer amounts to more than 10 percent of your revenue and your company will be more valuable than an industry peer with just a few big customers.

But don’t just think about a diverse customer base. It’s risky for your business to be dependent on just one or two key suppliers as well. So it’s good to spread your business around.

And what about your employees? Think about the easiest people to replace and the most difficult to replace. If you are too reliant on a special employee, then you are subject to undesirable risk should they decide to join a competitor or move to Thailand.

7. Predictability

If you’ve mastered a way to win customers and documented your sales funnel with a predictable set of conversion rates, your secret customer-acquiring formula will make your business more valuable to an acquirer than an industry peer who doesn’t know where their next customer will come from.

8. Clean Books

Properly audited financial statements give potential buyers a lot more confidence in the numbers behind your company’s operations. Companies that invest in audited statements have financials that are generally viewed by acquirers as more trustworthy and therefore worth more.

You may want to get your books reviewed professionally each year even if audited statements are not the norm in your industry.

9. A Second-in-Command

Acquirers can be discouraged if all the power and knowledge is in the hands of an owner that will not stay with the company long after it changes hands.

Businesses with strong management team, particularly a good second-in-command who has agreed to stay on post-sale, are more valuable than businesses where all the power and knowledge are in the hands of the owner.

10. Happy Customers

Being able to objectively demonstrate that your customers are happy and intend to re-purchase in the future will make your business more valuable than an industry peer that does not have a means of tracking customer satisfaction.


Like a rising tide that lifts all boats, your industry typically defines a range of multiples within you can sell your business. Since you probably aren’t changing industries any time soon, you can mostly take that range as a given.

You do, on the other hand, have a lot of influence as to where you fall in that range. Getting a multiple at the high end of the range is absolutely in your control with a proper focus on strategic thinking. 

If you want to begin analyzing how you can maximize your company's value, start with contacting the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. 

Tuesday, September 2, 2014

Are You Building a Business, or Doing a Job?

There are many ways to evaluate how successful your business is, but none more decisive than whether or not someone would want to buy your company.

Every business eventually sells or dies. If you are thinking about selling your business, perhaps now or perhaps in 10 years, you need to make sure you are creating an asset that someone else will want to buy -- otherwise, you have a job instead of business that can exist independently from you.

So here are eight ways to think about the difference, to ensure you are building a company, and not just doing a complicated job: 

(1) When you have a job, you show up at work to earn money. A strong company generates revenue whether you are there or not.

(2) A job is a place where your personal reputation massively impacts your results. A strong company is a place where the brand is more important than the personality of the founder(s).

(3) A job involves you using your personal experience and expertise to get a result. A strong company relies on processes and systems that can be managed and executed by different people to consistently produce desirable results.

(4) Do most of your customers have your cellphone number? Then there is a big possibility you have a job, not a business. The more your customers depend on you personally, the harder it is to grow and develop your business.

(5) In a job, you will get fired if you go on vacation too much, because your value comes from actually being there to work. But if you own a company, the ability to take vacations without hurting your company's performance makes your business far more valuable.

(6) Being in business means that your success comes from serving customers well. But if you are so reliant on a single customer that they can dictate how you deliver your product or service, your company is more like a job than a valuable business. A job is always dependent on one very important customer -- the employer. A strong business thrives by not being overly reliant on a particular customer.

(7) With a job, it's up to you to solve problems. With a business, your employees should solve most problems.

(8) In a job, you can earn more money by working harder. If you are running a business, you earn more money by using resources more efficiently. Business owners seek profits -- they save or borrow saved money, hire workers, and buy or rent raw materials, land and capital. They then produce goods and services that are sold at a profit or at a loss. A profit means that the business owner used those resources wisely to serve customers, and a loss is a signal from customers that there were other uses for those resources that would have been better. If your rewards are based on working harder instead of working smarter, your business is more like a job. 


If you are looking to sell your business now or in the distant future, it's important to start looking at your business the way a potential buyer would see it. This will help you focus building your business above and beyond doing a job. 

To get started on this, you can can sit down for a free consultation with the MAXIMA Group . We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. We can offer insights about how your business is performing relative to others in the industry, how attractive it would be to potential buyers, and where you could improve the value of your company with a solid exit strategy.