Foundation for Success

FINDING THE RIGHT ANSWER STARTS HERE
Foundation
for Success
Creating a better
organizational structure
Retirement 5 tips for a
Savings
brighter future
Spring 2009 |
A word from our CEO
Daryl Ritchie, FCA
CEO, Meyers Norris Penny
Surviving and
thriving during
times of uncertainty
and your business. Knowing who you
are, including the challenges you face,
ensures we can help you make informed
decisions that keep you competitive.
Domestic and global economic
uncertainty is changing the way
Canadian businesses operate. This past
year, we have had to contend with
volatile capital markets, increased
foreign competition, erratic commodity
prices, fluctuating exchange rates,
increased labour shortages and more.
Our Spring issue focuses on the
challenges and opportunities during
times of economic uncertainty including:
available assurance alternatives; the
effects on the divestiture market;
options in retirement saving plans;
creating a better organizational
structure; and the importance of having
a solid strategic plan in place.
During times of uncertainty, businesses
must not only look at the issues
affecting their business but learn to
identify and take advantage of the
opportunities. That’s why your MNP
team takes the time to get to know you
On behalf of your MNP team, I hope
you enjoy this issue and welcome your
input. Please send your comments and
suggestions to [email protected].
In this issue
Published by:
Meyers Norris Penny LLP
Features
300, 622 5th Avenue SW
High scorer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
P: 1.877.500.0792
Retirement savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Managing Editor:
Foundation for success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Debra Beck
Maintaining direction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Calgary, AB T2P 0M6
[email protected]
250.863.5968
Additional info required! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Opportunity knocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Articles in this publication are
Timing it right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
position, nor should they be
neither official statements of
considered technical advice for
Regulars
individuals or organizations without
consulting an advisor.
A word from our CEO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
mnp.ca
2 MPACT > Spring 2009
2009
Economic
OUTLOOK
I
t was quite the ride. The 2008 economic
meltdown in the u.S. left Canadians
nervously watching their pennies and
business owners fearful of the impact of reduced
consumer spending and tight credit markets.
“fortunately, Canadian financial institutions
are fairly well capitalized,” says Helmut.
“Nonetheless, the market sentiment has
turned very negative and has re-priced risk
upwards on most investments.”
The sub-prime mortgage crisis, sudden
failure of major u.S. banks and faltering credit
markets were to blame, but these events
were only symptoms of the real problems:
easy credit, unaffordable mortgages and too
much consumer spending. All of these triggers
contributed to the crisis, which has had a
significant effect on the Canadian economy.
Canadian banks have responded by tightening
their lending conditions, contributing to
slower spending and economic growth.
“There are a number of linkages between the
financial markets of the u.S. and Canada,”
explains Helmut Pastrick, chief economist,
Central 1 Credit union. After American equity
markets hit frightening lows, the Canadian
equity market felt the force of weaker economic
performance, lower company earnings and
forced selling. In addition, lower commodity
prices had a substantial effect on Canada’s TSX.
The sub-prime mortgage crisis and
investments dependent on those mortgages
hit some Canadian financial institutions,
companies within Canada’s financial sector
and other industries significantly, with many
experiencing losses and write offs.
But the aftershocks of the economic
earthquake may not be as bad as feared.
“I don’t foresee a lengthy depression at this
point,” says Helmut.
As 2008 drew to a close, equity markets,
which, like commodity markets, are
forward-looking and anticipate changes
several months in advance, were beginning
to recover. Government and Central Bank
stimulus packages were also expected to
produce positive effects.
A mild recession extending into the first
half of the year, with the economy picking
up in the second half of 2009, is predicted.
As in past years, central Canada’s economy
is expected to suffer the most.
“ontario is fairly heavily exposed to the
u.S. market,” says Helmut. A failing auto
industry and the toll Canada’s stronger
dollar had taken on manufacturing will
further strain that province’s economy
throughout 2009.
while the energy market took a significant
dip in the latter part of 2008, it has
remained relatively strong throughout the
crisis, spelling good news for Alberta.
As growth prospects improve both globally
and in the u.S., commodity prices will rise
again. Helmut also expects the Bank of Canada
to lower its policy interest rate another 75
basis points to less than 1% in march 2009.
As for the economic outlook, Helmut
remains optimistic. He predicts government
measures will reduce the stresses on
American and Canadian credit markets,
allowing them to return to normal
conditions within the year.
fiscal stimulus is the new policy focus for
government in 2009. These aggressive
monetary and fiscal measures along with
private sector actions to reduce excessive
leverage and risk, puts the economy
back on a growth path later in 2009.
However, in the short-term, risks are on
the downside and the economy has yet to
travel through its low-point.
3
SOlutiOnS 2 gO SHOOtS FROM StaRt uP tO tOP-level PlayeR in ReCORD tiMe
S
olutions 2 GO Inc. is racking
up points in the video game
industry at an unparalleled
rate. The company, founded in 2004,
has grown from just over $17 million
in its first year to $453 million in
2008 and been ranked 16 in Profit
magazine’s Hot 50 Emerging Growth
Companies in Canada for 2007. It
also lays claim to second place in the
same magazine’s Top 100 Women
Entrepreneurs for that same year.
4 MPACT > Spring 2009
In spite of a faltering economy,
projections for 2009 are for sales
of over $550 million, taking the
company to a new level of success,
and co-owners (and siblings) Oliver
Bock and Gabrielle Chevalier don’t
expect to stop there.
“Entertainment is a recession-proof
industry,” Gabrielle says. “In the next
three years, we are going to be a
billion dollar company. That’s our goal
and we are going to achieve it.”
Gabrielle has spent 25 years working
within the video game industry and for
a period in the nineties, she and Oliver
were co-owners of a related company.
They sold the company in 1994 and
worked for others until 2003.
“The video game industry in Canada
has certainly changed and evolved
over those years,” she says. Until
recently, video game distribution in
this country was handled through a
traditional distribution model. Video
game publishers used distributors to
get their products to the Canadian
market in order to avoid the cost of
setting up a distribution infrastructure
in a relatively small market.
Gabrielle could see that the traditional
distribution model wasn’t working for
many of the third-party video game
publishers, those that publish software
to be used with the hardware produced
by first-party publishers, such as Sony
and Nintendo.
“Third-party publishers were having one
distributor represent them at retail, so
you’d have a distributor doing a sales
call to a Wal-Mart, representing 20 to 25
different lines,” she explains. “There’s only
so much shelf space in retail, so whose
product are they going to push?”
Solutions 2 GO was founded to offer
a solution to the publishers. The
company provides Master Distribution
services, taking on all traditional
distribution services except for sales
and marketing. Publishers don’t have
to set up a Canadian distribution
infrastructure, worry about currency
risk or sales tax issues, or undertake
the process of picking and shipping.
They do, however, have their own
sales team and a direct relationship
with retailers.
Gabrielle explains it this way: “You call
on the retailer, sell your product, decide
how to spend your advertising dollars.
We then take over. You tell us what the
orders are, we order the product from
the factory, bring it in to Canada, pay
the GST, pick, pack, ship, bill the retailers
and handle the receivables.”
The company also offers traditional
distribution to its clients when required.
Publishers who want to focus their direct
relationship solely on a few major retailers
can get Solutions 2 GO to call on other
retailers for them.
Publishers think the idea is a winner.
One of the biggest products in recent
years has been Activision’s Guitar Hero.
Every unit sold in Canada was shipped
through Solutions 2 GO’s Mississauga
facility. Activision calls on five or six direct
accounts, Solutions 2 GO picks, packs,
ships and bills for each sale and calls on
smaller retailers on behalf of its client.
The success of Solutions 2 GO, says
Gabrielle, stems from its commitment to
the highest level of customer service, a
commitment that led Gabrielle to consult
advisor David Stier, formerly of Toronto’s
Horwath Orenstein. Horwath Orenstein
merged with MNP last summer.
“David provided guidance in the areas of
accounting, finance and tax as they built
the business,” says Damon McDonald,
Senior Manager of MNP’s Manufacturing
and Distribution team in Toronto. “We
helped them identify accounting systems
that were appropriate for their industry
and operations and assisted them
throughout the process of obtaining
financing. In fact, we continue to perform
annual financial statement audits as a
condition of the financing they selected.”
Gabrielle’s long experience in the
industry and with her former company
led her to David and has kept her with
MNP. Solutions 2 GO knew they needed
assistance right from the beginning
in order to offer clients a smooth,
beneficial service they couldn’t refuse.
Getting financing was imperative. “David
was very helpful in always putting
together the right presentations and
knowing what the banks wanted to see,”
she says. MNP also assisted with setting
up an accounting system, developing a
master distribution model as well as
identifying the tax savings.
“They are very good business people,”
says Damon. “They also had a good
accounting department but MNP was
able to provide additional support
and services and help with accounting
records that would not only indicate
how well the business is performing
but also give the bank and vendors
confidence in the company. ”
Getting the accounting right was a
challenge due to the idiosyncrasies of
their unique business. Special rebates,
fees and staff turnover had to be taken
into account before the right system and
software was in place. “We also helped
them create candidate profiles and outline
the necessary qualifications for their
finance department needs,” adds Hilda Un,
an MNP Toronto office Manager on the
Solutions 2 GO service team.
Proactively setting up the company for
success has helped Gabrielle manage
the rapid growth Solutions 2 GO has
experienced since 2004. The company
began with a staff of two and now has 90
people on the payroll. Sales have grown by
an amazing 1300 per cent.
“With that kind of growth, it is extremely
important that you have processes. Very
critical,” says Gabrielle. “You can’t do
things haphazardly or you’d find yourself
in trouble quite quickly.”
Gabrielle has a long relationship with
Horwath Orenstein and is pleased with
the results of the company’s merger
with MNP. As Solutions 2 GO prepares
to conquer the next level of business
success through acquisition, Gabrielle
turned to MNP’s private equity group to
help secure a deal.
“To start with a new a face, a new
company, it doesn’t make sense,” she
says, explaining why she chose MNP
for help with the acquisition. “They
know the industry very well, they
know how our business works and
they understand the model. The more
services MNP has to offer, the more I’m
going to utilize them.”
5
Troubling economic times shouldn’t affect your decision to save for
retirement; you know the importance of a retirement or pension plan
to your financial future and your current tax strategy. But with money
needing to stretch further, it’s important to understand your options
so you can ensure you’re getting the most for your money today and
tomorrow. Here are five tips to help you save for your retirement.
Retirement Savings
5 tips for a brighter future
6 MPACT > Spring 2009
Discover a new way to save
Beginning January 1, 2009, all Canadians
over 18 can earn tax-free income in a Taxfree Savings Account (TFSA). Unlike with
traditional Registered Retirement Savings
Plans (RRSPs) and Individual Pension Plans
(IPPs), contributions are not tax deductible
in the year that you make them. Instead, all
income generated from this account is taxfree when withdrawn.
“The TFSAs are almost a no-brainer,” says
Ken Robinson, regional tax leader, B.C. Lower
Mainland region, MNP. “They offer another
saving option that you can take advantage of
even if you already have a RRSP or IPP.”
Make the most of your
contributions
RRSPs and TFSAs are referred to as defined
contribution plans, meaning the Income
Tax Act governs the contributions rather
than the benefits and your contributions are
consequently limited.
TFSA contributions are a flat $5,000 per
year. If you have an RRSP, you can contribute
18 per cent of your prior year earned income
or $20,000, whichever is less, for 2008.
An IPP, however, offers you the opportunity
to contribute a much higher amount
through your corporation. IPPs are defined
benefit plans, meaning the Income Tax Act
governs the benefit extracted from the plan.
Using your corporate and personal financial
information, an actuary determines how
much you need to contribute to get the
allowable benefit upon retirement.
A host of factors go into the actuary’s
calculation and in particular, age plays a
big factor in the size of the contribution.
A typical annual contribution would be
between $25,000 and $30,000.
Switching plans leads to
tax savings
Since 1991, small business owners have had
the option of choosing an IPP or an RRSP
rather than just an RRSP. Now, switching to
an IPP can bring a big benefit.
“You are allowed to make a past service
contribution to bridge the difference
between what you would have been able
to contribute to an IPP if you’d set one
up in 1991, or when your business was
incorporated if later than 1991, versus what
you have contributed to an RRSP,” says Ken.
The amount of the tax-deductible lump
sum contribution varies according to
your age, income and other factors, but
Ken says it’s typically between $100,000
and $200,000.
In addition, IPPs offer another deductible
lump sum opportunity upon retirement
referred to as terminal funding. This
contribution is typically in the range of
$100,000 or higher.
Look for the silver lining
The stock market crash took a bite out of
all types of retirement plans, but one plan
offered a bright side to the downturn.
“For RRSPs, what happens within the plan is
irrelevant. Whether your investments have
done well or they take a hit as they likely
have recently, it’s irrelevant to what you can
contribute,” says Ken.
But with IPPs, the value of the funds in the
plan dictates future contributions. “If you
have an IPP that has decreased in value, you
can have an actuarial valuation prepared
that will allow you to make substantial
additional contributions to bring the value
up to what it should be,” Ken explains.
Retirement savings plans
are not for everyone
Income earned within RRSPs, TFSAs and
IPPs loses its nature and is taxed at regular
rates rather than at the preferential rates
for dividends and capital gains earned
outside of retirement savings plans. In
addition, they can be quite restrictive in the
investment options available to you.
Ken advises everyone to weigh the benefits
of tax deductible contributions and tax
deferred growth by contributing to an RRSP
or IPP against the loss of the preferential tax
rate on withdrawal.
The type of investments in your portfolio
and the length of time until retirement will
play a role in your decision. “If you’re going
to retire in a few years and are going to
be heavily invested in the equity market,
you may be better off investing outside of
these plans and forgoing the benefits in
exchange for an overall lower rate of tax
on earnings,” he says.
If you still have many years until
retirement but want to avoid losing the
benefit of a preferential tax rate, you
should weigh your overall investment
portfolio accordingly. Keep interest in your
retirement plan and invest in equity and
dividend funds outside of the plan.
For more information on saving for
retirement, contact Ken Robinson,
Lower Mainland’s regional tax leader at
1.604.949.2088 or your local MNP office.
Contribution
Deadlines
RRSP contributions are deductible
to the individual if made in the
year or within the first 60 days
of the following year, while IPP
contributions are deductible by
your corporation if made in its
fiscal period or in the first 120 days
of the following fiscal period. TFSA
contributions are not deductible so
contributions can be made at any
time. All three plans have carryover
provisions for unused contribution
room. Unlike RRSPs and TFSAs,
interest on funds borrowed to make
IPP contributions tax deductible.
7
FOUNDATION for
Creating a better organizational structure
T
he meltdown of the U.S.
economy shook companies
across North America. As
consumer spending dropped and credit
became scarcer, savvy owners and
executives began to ask some serious
questions. How can we better serve our
customers? What should we do to stay
competitive? Can we still achieve our
growth targets?
Looking internally at the way your
company is organized is one way to
find the answers.
SOliD FOunDatiOn
“Your organizational structure is really
the underpinning of how the people in
your company communicate, how they
report and how their performance is
measured,” says MNP’s practice leader
of consulting services in Vancouver,
Dawn Glyckherr. “If you are improperly
organized, you can be losing countless
dollars on your bottom line.”
A review of your organizational structure
allows you to:
• Examine the effectiveness and
efficiency of each organizational
component
• Ensure every aspect of your
organization is integrated and
aligned with the strategic goals
8 MPACT > Spring 2009
• Provide everyone in the company
with a clear understanding of the
relationships between functions,
practices and processes
• Build on your company’s
strengths while minimizing any
weaknesses
• Create roles with clearly defined
responsibilities and appropriate
workloads.
Another big benefit? Increased retention.
“People are concerned about losing
their jobs in a recession, but the
truth is we have a labour shortage
projected to last until 2030,” says
Dawn. “Reviewing your organizational
structure and chart allows you to
grow your brand while really looking
at the people you have, making
sure they’re fully utilized and as
productive as they can be.”
wHen tO lOOk FOR
StRuCtuRal CRaCkS
Economic slowdowns and recessions
offer the opportunity to stop
focusing on the next market, the next
customer, or the next big sale. It’s time
to start looking at your competitve
advantages and how you can capitalize
on them to ensure success during
tough periods and in the future.
“Economic slowdowns provide good
leverage to employers,” says Dawn.
Undertaking a review during a slowdown
shows your workforce you’re serious
about retaining them. “It also provides
you with the opportunity to review your
compensation structures and ensure
you’re paying people appropriately.”
You’ll also want to review your
organization when you see warning signs
that your structure may not be working.
These include rapid turnover (especially
concerning in an economic downturn,
when employees tend to hold onto their
jobs) and lack of progression up your
organizational chart.
“One of the key reasons people leave
organizations is poor management,” Dawn
says. Many owners of small to mid-size
companies have tried to structure their
companies with very little management,
using a very flat organizational structure
popular in the late eighties, early nineties.
“Today, people understand the role of
management in retention and want to see
management in the structure,” she explains.
Rapid growth also calls for an
organizational review. Companies that
have gone through growth and change
often experience structural problems.
What started out as a clear function
and job, can over time, begin to gather
SUCCESS
more and more duties that really
should be separated into two jobs.
Both jobs need to be represented on
the organization chart.
tHe PROCeSS
“When we conduct organizational reviews,
we typically begin by looking at four
elements of the organization,” explains
Rossana Buonpensiere, MNP’s practice
leader of consulting services in Winnipeg.
The typical review examines these aspects
of companies:
1 . accountability: are there clear lines
of responsibility?
2 . effectiveness: are the different roles
or departments achieving goals that
will advance the strategic business
direction of the company?
3 . efficiency: are you achieving results
in the most cost-effective way
possible?
4 . value: are your clients getting value
and do they recognize that value?
How do you get the information you need
to effectively analyze these areas? Ask.
Talk to your employees and your clients
individually or in a focus group setting. You
can also use surveys or questionnaires to
find out what’s going on.
“MNP can also help by gathering best
practices data that you can benchmark
your company against,” says Rossana.
Knowing how your competitors are
structured can be valuable when
making your own organizational
structure decisions. For those
interested in adopting the best of the
best, there are also ways to access
global best practices.
Remember to look at your formal
organizational structure as well
as your informal structure. Every
company has both and, while the two
would be identical in an ideal world,
they are typically slightly different.
“It’s like a grapevine,” says Dawn.
“If the informal structure is simply
supporting the formal structure and
the gap is not too wide, that’s okay. If
the informal structure is pulling away
from the formal structure, you have
to be concerned.”
wHO SHOulD DO tHiS
Every company, regardless of the
number of employees, must have a solid
organizational structure. In small familyrun operations, the shareholder role
can get confused with the operational
role and before long, employees find
themselves unable to communicate up
or down the structure. If your company
is large, you may want to review the
structure of the entire organization or of
specific departments.
For those feeling the effects of
economic instability in the market,
an organizational review can help you
streamline, ensuring you’re getting the
most for every dollar you spend during
a difficult time.
For more information on creating a
better organizational structure contact
Dawn glyckherr, MnP’s practice leader
of consulting services in vancouver
at 1 .877 .688 .8408 or Rossana
buonpensiere, MnP’s practice leader
of consulting services in winnipeg at
1 .877 .500 .0795 or your local MnP office .
7 CHaRaCteRiStiCS OF a
gOOD ORganiZatiOnal
StRuCtuRe
• Easy to understand
• Does not have one person managing
too many people
• Has balance in terms of portfolio size
• Consists of job positions designed
based on what the company needs,
not what best suits the individual’s
qualifications
• Has specialized positions in which
each individual is responsible for
certain types of activities
• Decentralizes authority so decisions
can be made as far down in the
company as possible
• Leadership positions include
responsibility for results and
authority for getting the job done
9
MAINTAINING
DIRECTI N
Re-evaluating strategic plans keeps businesses on course
S
trategic plans provide a detailed
map for your organization so you
can achieve your business goals.
But when changes occur, whether within
the organization or in your operating
environment, the best laid plans can
quickly become irrelevant.
Take instability in the market, for example.
“when the economy becomes less stable,
your strategies or the timing of those
strategies may need to change,” says Judy
murphy, mNP business advisor in winnipeg.
If your strategy is to enter a new provincial
market, a downturn might mean you need to
change the way you go about doing that but
it doesn’t necessarily mean your company is
no longer committed to that strategy.
A slowdown in the economy, a change
in your competition, the loss of a key
employee and rapid growth are just some
of the changes that call for a peek at your
strategic plan.
uSing OutDateD PlanS
The problem with using a plan that doesn’t
reflect current information is obvious: you
are not able to achieve your goals. At the
very least, your business will not be able
to move forward; more seriously, you may
begin to see cash flow and profit problems.
Loss of employees can also result. “People
need to know what they’re doing and
why they’re doing it and a strategic plan
communicates that to your employees,”
says Jennifer Young, a business advisor in
mNP’s Vancouver office. “Additionally,
10 MPACT > Spring 2009
research shows that most employees value
being asked for their opinion and being
able to contribute to the success of the
organization over financial compensation.”
An outdated plan also limits your ability
to react when something happens. “most
people create a plan reactively when they hit
a crisis,” says Jennifer. “If they had a current
plan on hand, they would know how to
react when the economy dips or when an
unexpected opportunity comes along.”
COnDuCting a Review
reviewing your strategic plan doesn’t require
as much time, or input from your employees,
as creating one. “You can begin by taking the
success indicators in your plan and assessing
your performance against them. Has the
plan worked so far?” says Judy.
You will also need to determine the
effects of any changes in your operating
environment on your current strategic
directions. External factors, including any
changes to your customer needs, may
present new opportunities and threats.
Internally, consider whether your strengths
or weaknesses have changed. with this
information, each strategy can be evaluated
by balancing risk and opportunity.
why go into such detail? Sometimes,
opportunities and threats aren’t immediately
obvious. for example, the downturn in
the u.S. market and change in the dollar
presented an opportunity for the B.C. lumber
industry. Simultaneously, the downturn in
the housing market threatens the industry.
In this case, developing a strategy requires
lumber companies fully understand the
implications of both events.
uSing yOuR new Plan
All across the nation, dusty strategic plans
languish on executives’ shelves and in
bottom drawers. “That’s no good to you,”
says Jennifer. “If your plan is dust-free, it
means it’s up-to-date, you’re following it,
and it’s actually a useful document that
accurately reflects your business.”
For more information on strategic
planning, contact business advisors
Judy Murphy at 1 .877 .500 .0795 or
Jennifer young at 1 .877 .688 .8408 or
your local MnP office .
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Additional Info. Required!
When lenders request higher levels of assurance
Y
ou sit across from your lender,
ready to quickly renew your line
of credit when you’re hit with
shocking news. The level of assurance you’ve
always provided isn’t enough anymore.
doesn’t actually provide any assurance.
Essentially, your accountant simply puts
your numbers into a financial statement
format, summarizing your operations for
presentation to the lender.
“I have a client who was used to calling his
banker and saying ‘I need this much money in
this amount of time.’ whether it was because
of a change in the banker or because credit
was starting to tighten, he suddenly needed to
provide a lot of information before they were
prepared to advance him any funds,” says
Kathy Carry, an mNP partner in Calgary.
Compilations do not have to follow
Generally Accepted Accounting Principles
(GAAP), nor is your accountant required
to ensure your financial statements reflect
what’s really going on in your business. A
notice to the reader is attached, informing
the reader that the accountant has not
verified the accuracy of the numbers.
There is no need to take requests for more
assurance personally. An unstable economy
and tight credit markets simply mean
lenders need to know more about their
clients. “They need more comfort around
the numbers,” says Tanya Knight, an mNP
business advisor in Brandon. “The financial
institution doesn’t want to take unnecessary
risks and needs more certainty about where
you are financially.”
2. Review: A review engagement is an
intermediate level of assurance telling your
lender that your accountant hasn’t noticed
anything that would make your financial
statements appear to be implausible. Your
statements are assessed through inquiry,
analysis and discussion.
In light of the economic situation, everyone
should expect to be asked more questions
by their lender. This could lead to a higher
level of assurance and a possible delay in
obtaining money due to the extra time it
takes to compile the required information.
understanding what your lender needs and
which alternatives to present helps to reduce
costs and ensures you have the funds you
require when you need them.
aSSuRanCe levelS
There are three levels of assurance
commonly requested by lenders:
1. Compilation: A compilation
engagement, also called a Notice To reader,
reviews must comply with GAAP, increasing
the cost because your accountant has to
follow certain procedures and meet certain
requirements. At the end of the process, you
can present your lender with a balance sheet,
income statement and cash flow statement
as well as notes with further information.
3. Audit: The highest level of assurance, an
audit opinion is also the most expensive
and time-consuming, especially if you’ve
never had to gather this level of information
before. while they don’t guarantee 100%
accuracy, audits give an opinion that your
financial statements are not materially
misstated so lenders know the numbers you
present are reliable.
during the audit, your accountant analyzes
the numbers and asks you to explain
inconsistencies. Assets are inspected and
balances confirmed.
A significant amount of additional work
is required when you need a review rather
than a compilation, or an audit rather than
a review. “And if we haven’t been doing
the statements at that level in the past,
you have to do two years of work at that
level in order to deal with the opening
balances, because you’ve got some cut off
issues,” says Kathy.
Another hurdle is finding the information
you need for each level. “If you’ve never
had an audit before, you may not have the
controls or processes in place to gather the
required information,” warns Tanya.
Your advisor can help you determine
what level of assurance you will need
and assist you in setting up the internal
reporting that will give you the necessary
information. A good advisor can also
identify alternatives that may save you
time and money.
“Sometimes what lenders want is just
some additional disclosure, in which
case we maybe don’t need to change the
report or change the level of assurance,
but we could provide additional notes to
the financial statements that would give
the financial institution what it needs,”
says Tanya.
Personal guarantees, pledging assets as
collateral or agreeing to provide monthly
or quarterly statements are other options
your lender may accept.
For more information on assurance
services, call kathy Carry, an MnP
partner in Calgary at 1 .877 .500 .0795 or
tanya knight, an MnP business advisor
in brandon at 1 .800 .446 .0890 or your
local MnP office .
11
Opportunity
KNOCKS
the upside of a downturn
T
here is no doubt that a
downturn in the economy or
your industry is challenging.
For those experiencing slowing sales and
plummeting profits, the situation can
even be frightening. A shift in perspective,
however, can help you turn a seemingly
negative situation like an economic slump
into a launching pad to increased success.
“It’s all about using your downtime
wisely,” says Geoff McIntyre, a business
advisor in MNP’s Kelowna office. “Those
who take this time to refocus on their
businesses, to get back to practicing the
fundamentals of good business, are going
to be ready to jump to a whole new level
when the economy picks up again.”
baCk tO baSiCS
Good business practice dictates that we
should be monitoring our operations
constantly to ensure stakeholders and
clients are getting value for every dollar
spent. But many Canadian business
owners have been extremely busy over the
last few years and have lost sight of what
really drives profit to the bottom line.
“You get trapped dealing with day-to-day
issues and don’t take the time to step back
and look at your business from a higher
level,” says Geoff.
2009
12 MPACT > Spring 2009
Getting back to fundamental business
practices during a slowdown helps you
survive the tough times and gives you
more control in a situation driven by
external factors.
“The one thing really impacting people
here in Ontario is the fluctuating US
dollar,” says Paul Dunnett, regional
managing partner in MNP’s Toronto
office. “Our clients are focusing on
ensuring they are as efficient as possible
in every aspect so they can survive tight
margins and lost sales.”
Assessing and improving efficiency is done
by examining every process within the
company, documenting procedures and
analyzing how well they work.
“The cost/benefit analysis has to be
quick,” says Paul. “You don’t have time to
do a long-term study and make gradual
changes to your operation if you want to
avoid losing profits during a slump.”
There are ways to increase efficiencies in
virtually every company. Paul says it helps
to have experience and be willing take off
blinders and look for innovative solutions.
“Maybe you can’t reduce the cost of
production in your plant but what about
outsourcing production at a lower cost?
That can be done if you know where to
look,” he explains.
take tHe lOng view
Cost cutting may be necessary to stay
afloat during a downturn but the effects
of those cuts can have negative long-term
consequences. For example, deciding to
forego maintenance or repairs on your
equipment will save you money today but
cost you plenty in the future when you
have to replace that equipment.
“We want to look critically at our costs,
both fixed and variable, and ask how the
cash outlay contributes to the profitability
of the business,” says Geoff. “Is that dollar
better spent somewhere else? Do you
even need to spend it?”
A cost/benefit analysis is particularly
important when considering cutting
advertising dollars or wage costs.
Measuring the results of advertising
dollars is difficult, making it hard to
evaluate whether your spending is
increasing your bottom line. Wage costs
are often one of the first cuts made but
that may not be the best decision.
“Rather than reducing wage costs,
it’s better to align your employees’
goals and motivations with those of
the business,” explains Geoff. “When
my clients restructure compensation
packages in such a way that they
don’t have to spend more but are
able to motivate employees, they
increase profits, which is what you
really want to do.”
In fact, increasing your wage costs can
be the smarter option. Quality talent
is one of the most scarce resources
haunting every industry. If your
competitors are downsizing, consider
securing available talent now rather
than finding yourself short-staffed in
the future.
FunDing CHange
Determining where to cut costs, make
operational improvements and when to
take advantage of hiring or acquisitions
all cost money, at a time when you
have less resources to spend.
You may need to create cash through
such actions as selling redundant
assets. If you export, consider taking
advantage of the Export Development
Corporation, a government agency
that provides cash on your receivables.
“Depending on what you do, there may
be a trade off between cash and profit.
Ultimately, if you don’t have the cash,
you don’t have the ability to create
solutions to improve cash flow and
profitability in the future,” suggests Paul.
HOw iS eveRybODy
DOing?
Tough times affect everyone,
including your customers.
While it is important to
hold onto key customers
throughout a slowdown,
their financial problems can
negatively affect your cash
flow and your business.
Watch for warning signs that
might mean the customer is
struggling:
• Delayed bill payments
• Requests to renegotiate
credit terms
• Requests to renegotiate
pricing
• Cancelling contracts
Talk to your customers and let
them know you’re willing to
work with them if necessary,
perhaps by extending credit
terms or allowing installment
payments. The efforts you
make on their behalf today will
pay dividends when the market
picks up again. “What you’ve
done is solidified their loyalty
to you,” says Geoff. “People
remember those that have
been good to them through
thick and thin.”
For more information on operational
efficiency, contact geoff Mcintyre,
a business advisor in MnP’s kelowna
office at 1 .877 .766 .9735 or Paul
Dunnett, MnP’s regional managing
partner in toronto at 416 .596 .1711
or your local MnP office .
13
Timing it Right
taking control
of your ability
to sell your
business .
T
o build the business you have
today, you’ve invested years of
your life and the bulk of your
financial resources. Now that you are
ready to move on, you want to make sure
you sell it for a good price. unfortunately,
factors beyond your control, such as
instability in the economy, affect the
divestiture market and could potentially
affect your ability to sell.
when turmoil hit the North American
economy, the divestiture market felt
the impact. “Potential buyers showing
strong interest in certain opportunities
started taking a lot longer to decide
whether to make an offer,” says wes
Priebe, senior vice president and director
with Tamarack Capital Advisors in
Edmonton. Buyers were waiting to see
what effect instability would have on the
price of acquisition opportunities.
with the stock market on shaky
ground, large public companies
normally interested in acquisition
could not access capital, reducing
the pool of potential buyers. That
pool was further depleted as banks
tightened up on financing. Private
equity groups often look at leveraging
the assets of acquisitions. more
stringent guidelines for obtaining
financing has led some groups to opt
out of purchases and others to take
longer to complete an acquisition.
Complicating matters is the fact that
business owners desperate to get out,
sell at discounted prices during times of
14 MPACT > Spring 2009
economic uncertainty,
driving down the
value of multiples and
potentially affecting
the value of your
business. “when
buyers think they
may be able to find
acquisitions at slightly
depressed prices, they
tend to wait for those
opportunities,” says
Adam mallon, vice
president and director
with Tamarack Capital
Advisors in Edmonton.
tO Sell OR nOt
tO Sell
An unstable economy
or struggling industry
doesn’t necessarily
mean owners should
put off selling if they are
ready to take that step.
“Even with all the gloom
and doom in the market
and the instability,
good companies with
good management and
service are still going
to be attractive,” says
Adam. “It may take a
little bit longer, but it will still sell.”
Businesses with a unique product or
geographic market always attract interest
from buyers. Even a company experiencing
a decline in sales or profitability
in an industry where market
conditions are down is still
valuable to the right buyer.
Buyers understand market
conditions within the industry
and they know it will improve,
looking for the long-term value
within the business.
“don’t assume you can’t
sell. You may not realize your
business is unique or that there
are potential buyers out there
that are looking for exactly
what you have to offer,”
explains wes.
enSuRing SuCCeSS
whether you put your
company on the market
when conditions are
slightly unfavourable or
decide to hold on, you can
improve your chance of
success by keeping your focus
on running the business.
“If you start losing interest
in the business, it shows in
your financial performance,”
warns wes.
Continue following
good business practices,
managing your balance sheet and
your cash flow carefully to maintain
profitability. Planning ahead for the
sale is also valuable.
“It makes sense to look at what you can
do to optimize the value of your company
and position it properly,” says Adam. This
will vary from business to business, but
Adam and wes point to some actions
many business owners can take.
Cleaning up financial statements is
first on the list. Eliminate assets not
required for the business operation and
make sure that the business is properly
structured. You also need to substantiate
any expenses that are not integral to
the operation going forward as it may
be difficult to get any value on those
expenses when you sell.
“run your company as cleanly as you can,”
advises Adam. “It can mean paying a little
more in taxes but you’ll see the benefit
when you sell the company.”
Creating a strong management team
is another good move. Buyers prefer
to see companies that can operate on
their own, without the close attention
of the shareholders.
Talking to your accountant and a corporate
finance advisor about your goals is an
excellent starting point. The earlier you
and an mNP advisor establish measures for
conservation, the better. The longer your
business has to appreciate, the higher the
value will be when it comes time to sell.
For more information on selling
your business, contact wes Priebe
or adam Mallon, tamarack Capital
advisors at 1 .866 .465 .1155 or your
local MnP office .
15
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