Mergers and Acquisitions (M&A) are often considered as one of the most important corporate strategies to grow a business and create value. The success of any M&A deal, however, depends on both parties agreeing on a fair valuation of the target company.  However, business valuation is subjective and open to interpretation.  Buyers cannot afford to overpay for the business and most sellers cannot afford to leave “money on the table.”
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When the valuations of the acquiring company and the target company are different, it creates a valuation gap that needs to be bridged before the deal can be completed. To bridge valuation gaps, both parties need to have a clear understanding of each other's goals, expectations, and motivations. In this blog article, we discuss some of the most common approaches to bridging a valuation gap in M&A.

1. Negotiations and Facts First: The first step in bridging the valuation gap is to negotiate based on agreed upon facts and circumstances.  Misunderstandings, misinterpretations, and misinformation can all lead to a valuation gap that can sometimes be resolved through good-intentioned negotiations that may involve discussing and agreeing on the company's financials, competitive landscape, and future growth prospects.  The future growth prospects need to be realistic and based on a successful track record of entering new markets, acquiring new customers, growing with existing customers and developing new products or services.  We have outlined how sellers should be careful in how they present their projections in a previous blog article.
2. Due Diligence: Conducting thorough due diligence on the target company can help uncover hidden value for the buyer and reduce the valuation gap. This process can help the acquiring company gain a better understanding of the target company's financials, operations, growth prospects and risk profile allowing for a reduction in any valuation gap.
3. Alternative Deal Structures: Deal structure can be an important tool to help mitigate valuation gaps. For example, offering earnouts or contingencies, such as a portion of the purchase price being contingent on the target company meeting certain financial targets or other milestones, can help bridge valuation gaps by aligning the interests of the buyer and the seller.  We have outlined many deal structure ideas to consider when there is a valuation gap in a previous blog article.
4. Synergies: Synergies, such as cost savings and revenue enhancements, can also help bridge the valuation gap. The acquiring company can sometimes estimate the potential synergies and use them to help justify a higher valuation of the target company.
5. Third-Party Valuation: In some cases, bringing in a third-party valuator can help bridge the valuation gap. An independent valuation can provide a more objective assessment of the target company's value, which can be used as a starting point for negotiations.
6. Consider Non-Financial Considerations: Valuation is not just about numbers, and non-financial considerations can play a significant role in bridging valuation gaps. For example, the target company's culture, reputation, and strategic fit with the buyer can all have an impact on the value of the deal.
7. Communicate Clearly and Openly: Communication is key in bridging valuation gaps. Both parties need to be transparent about their goals, expectations, and motivations. This can help to build trust and avoid misunderstandings, and to find mutually beneficial solutions to any valuation gaps.

In conclusion, bridging the valuation gap in M&A can be challenging, but it is essential to ensure the success close of a transaction. By considering these approaches, acquiring companies can find a mutually agreed-upon valuation that creates value for both parties.

Exit planning for private business owners can be a complex process that requires careful consideration of a wide range of issues.  There are no simple templates or guidelines to follow since everyone’s situation is unique. There are, however, many online resources (eg: Exit Planning Institute) that outline the most important steps.  Here are some of the most common pitfalls business owners need to avoid.
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1. Waiting too long to plan: One of the biggest mistakes business owners make is waiting too long to plan their exit. By waiting, they limit their options and may not have enough time to prepare their business for a successful transition.

2. Not considering all options: Business owners should be open to all exit options, including those that may not have been considered previously. Failing to consider all options can limit their ability to maximize the value of their business.

3. Overestimating the value of the business: Business owners may have an unrealistic view of their business's value, which can lead to disappointment and frustration during the exit planning process.

4. Failing to engage professional help: Exit planning can be complex, and many business owners don't have the expertise to navigate the process on their own. Engaging a team of professionals, including financial/tax advisors, attorneys, and accountants, can help ensure a successful exit. Engaging professional M&A advisors can also be a valuable step for private business owners considering a sale to a third party. Here are some benefits of working with M&A advisors:

a) Maximizing business value: M&A advisors have the experience and knowledge to help business owners market their business for the highest value through a competitive bidding process. They can help identify the best potential buyers and help negotiate favourable terms for the sale.

b) Help you stay focused on running the business: Hiring an M&A advisor to assist in the sale of the business adds specialized expertise but also gives the management team more bandwidth to continue to manage the business during the process.

c) Brings credibility to the sale process.  Potential buyers know that the owner is serious about selling and is not wasting their valuable time.

d) Assist in preparing for and completing due diligence. M&A advisors can help manage the due diligence process, ensuring that all required information is gathered and reviewed in a timely manner.

e) Confidentiality: M&A advisors can help maintain confidentiality throughout the sale process. They can assist with communication with potential buyers and help ensure that sensitive information is protected.

f) Expertise: M&A advisors have a deep understanding of the sale process, including best practices, and can help solve potential challenges. They can provide guidance and support to help ensure a successful outcome.

g) Network: M&A advisors have a network of contacts and resources that they can leverage to help find potential buyers and negotiate the best terms for the sale.

5. Failing to plan for tax implications: Tax considerations are a critical part of exit planning, and failing to plan for them can have a significant financial impact. Business owners should work with their tax advisor to understand the tax implications of their exit strategy.
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By avoiding these common pitfalls, private business owners can increase the chances of a successful and profitable exit. Proper planning and preparation are essential to ensure a smooth transition and to maximize the value of their business.

Transferring ownership to management or employees can be an effective way of ensuring business continuity by fostering a sense of ownership among key stakeholders. In addition to the various strategies, it is essential to consider the tax implications for sellers and identify the most suitable financing options for each ownership transition method. This blog article explores effective strategies for ownership transition to management and/or employees while highlighting the tax considerations and financing avenues for sellers.

Employee Stock Ownership Plans (ESOPs):
ESOPs offer a powerful mechanism for employee ownership. By establishing an ESOP, companies can allocate ownership shares to employees, either through direct purchases or contributions by the company. ESOPs provide a sense of pride, loyalty, and alignment among employees, as they directly benefit from the company's success.  They can also provide sellers with a tax-advantaged exit strategy. Under certain conditions, the sale of shares to an ESOP can qualify for tax deferral or exemption. The seller can potentially defer capital gains taxes by reinvesting the proceeds in a qualified replacement property. Financing an ESOP can be accomplished through corporate funds, seller financing, and/or third-party loans, such as bank financing.

Management Buyouts (MBOs):
MBOs can be an option when the existing management team possesses the skills, experience, and vision necessary to lead the company forward through its next phase of growth and development.  It can help ensure continuity by leveraging the management team’s in-depth knowledge of the company's operations and its growth strategy. Structuring the transaction as an installment sale allows sellers to defer tax obligations and spread them over several years. Financing an MBO often involves a combination of the management team's funds, external debt from banks or other lenders (including the seller), and potential equity investments from private investors or Private Equity Funds.

Phantom Stock Plans, Stock Option Plans, and Restricted Stock Units (RSUs):
Phantom stock plans allow employees to share in the future growth and success of the company without transferring actual ownership. Under this arrangement, employees are granted virtual shares that mirror the value of actual company shares. Upon reaching a predetermined triggering event, such as a sale, employees receive a cash payment equivalent to the increase in the company's value. 

Stock option plans enable employees to purchase company shares at a predetermined price within a specified timeframe. This approach allows employees to acquire ownership at a discounted price, fostering a sense of ownership and motivation. Stock options often have vesting requirements, aligning the interests of employees with the long-term success of the company. 

Similar to stock options, RSUs grant employees actual shares instead of the right to purchase shares. RSUs typically have vesting conditions, such as time-based or performance-based milestones. Upon vesting, employees become full shareholders with voting rights and the potential to receive dividends.

From the seller's perspective, while these plans can be dilutive, equity-based or equity-like plans typically do not have immediate tax implications. Taxes are normally incurred by the employees upon exercise or vesting, respectively. Companies can use corporate funds or borrowings to support the plan's administration and any associated cash payments to employees.

Employee Cooperative:
Employee cooperatives represent a democratic ownership model where employees collectively own and govern the company. This approach allows employees to actively participate in decision-making processes, share profits, and benefit from the company's success. Employee cooperatives foster a strong sense of ownership, empowerment, and engagement among the workforce. Sellers can benefit from tax advantages when selling to an employee cooperative. In certain jurisdictions, they may be eligible for capital gains tax relief or exemption. Financing an employee cooperative can involve contributions from employees, cooperative loans, external financing, or seller financing, depending on the structure and financial capacity of the cooperative.

Employee Ownership Trust (EOT):
EOTs provide a mechanism for transferring ownership to employees over time. The company establishes a trust that purchases the shares from the current owner(s) using corporate funds or borrowed money. The trust holds the shares on behalf of the employees, who benefit from distributions made by the trust, fostering a shared sense of ownership and long-term sustainability. Sellers in an EOT transaction may be eligible for capital gains tax relief or deferral in some jurisdictions. Financing an EOT can be facilitated through various means, including the company's funds, seller financing, bank loans, or a combination of these sources.

While similar in many ways to an ESOP, an EOT is not a qualified retirement plan and is typically not subject to the same regulatory requirements as ESOPs.

When considering ownership transition options to management or employees, sellers must carefully evaluate the tax implications associated with each strategy. ESOPs, MBOs, and employee cooperatives can offer tax advantages, such as capital gains tax deferral, or relief. On the financing front, each option may require a tailored approach. ESOPs may involve corporate funds, seller financing, or third-party loans. MBOs typically require a mix of personal funds, debt financing, and potential equity investors. Employee cooperatives and EOTs can be financed through a combination of employee contributions, cooperative loans, seller financing, and external financing.
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By taking into account the tax implications and suitable financing options, sellers can make informed decisions regarding the best management and/or employee ownership transition strategies for their business. It is recommended to consult with tax advisors, legal experts, and financial professionals to navigate the intricacies of tax regulations and identify the most suitable financing options for a smooth and successful ownership transition to management and/or employees.

Adjusted or normalized EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a commonly used metric in M&A (Mergers and Acquisitions) transactions to assess a company's financial performance and to provide a baseline earnings metric upon which to apply a multiple when determining its enterprise value. The adjustments are added or subtracted from the actual EBITDA to better reflect the normalized earnings that would, or could, be expected under new ownership before any anticipated synergies or any changes to the strategic plan.

Sellers often provide potential buyers their view on adjustments for certain one-time or non-operational expenses to add back to EBITDA. However, determining the appropriate add-backs to include can be challenging, and different buyers may have different views on what qualifies as a legitimate add-back.

Here are some common and legitimate add-backs that seller should consider:

Non-recurring or one-time expenses: Expenses that are unlikely to occur again in the future, such as restructuring costs, severance payments, or legal settlements. One-time expenses could be related to a specific event, such as the acquisition of a new business, a significant investment in a new product, service, or technology or expenses related to a natural disaster. Expenses related to termination of leases or other operating contracts may also be legitimate one-time expenses that should be added to EBITDA.
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Consulting and other professional service fees:  Often business owners hire an M&A advisor to help them prepare the business for a sale and to represent them in a competitive process.  Any upfront fees paid by the seller can be added back.  There are also times when an outside consultant is used on a periodic basis that can often be considered a reasonable add-back.

Owner/management compensation: If the company's owners or executives are taking a higher salary than what many may consider the market rate, the portion of their compensation that is “above-market” can be added back to the EBITDA.  Sometimes, the owner-operator will be leaving post-transaction and the seller adds back their entire compensation.  This is only considered reasonable by the buyer, if the owner is collecting a salary but is not involved in any day-to-day activities or functions within the business (i.e. absentee owners).

Other expenses: Expenses that are not directly related to the company's core operations or expenses related to the owners that are non-operational, such as personal expenses or payment of premiums for owners’ life insurance policies.  Some expenses that could have been capitalized could be included here.  Often EBITDA is normalized to exclude other expenses and income related to the gain/loss on the disposition of assets, foreign exchange gains/losses, etc.

Non-arm’s lengths transactions: Expenses to related parties that are above or below market need to be added to (when above market) or subtracted from (when below market) from the Adjusted EBITDA.  This could include product discounts or preferred terms to affiliated firms, lease/rent costs for facilities with common ownership, etc.

There are numerous items that may or may not be legitimate add-backs such as lost/deferred revenue due to temporary price reductions or increases, or temporary changes in product purchasing and sourcing costs (cost increases, freight expediting, etc.).  There could also be one-time retention incentives, employee absence or severance costs, and/or re-hiring costs that increased total compensation expenses that may be legitimate EBITDA add-backs.

While add-backs can help adjust the EBITDA to provide a more accurate picture of the company's financial performance, it's essential to use them judiciously. Buyers may get frustrated and the seller may lose credibility if they add back too many expenses and overestimate its normalized EBITDA. Buyers may also question the legitimacy of add-backs that appear to be subjective or those that are not supported by documentation.

In summary, when considering add-backs in M&A deals, it's crucial to be transparent and consistent and provide detailed documentation to support the add-backs. For investors and lenders to accept these "add-backs" into their valuation and underwriting methodology, add-backs must be reasonable, well-documented and defensible. Buyers will appreciate a clear and reasonable approach to add-backs that accurately reflects the company's financial performance.

Economic Value Add (EVA) is a financial metric that is becoming increasingly popular among companies looking to create long-term enterprise value for their owners. It measures the “economic profit or loss” of a company rather than its “monetary profit or loss” and is considered by many to be the best financial metric to focus on because it considers both the costs and benefits of invested capital.

A business that focuses on increasing EVA over the long term, becomes meticulous at managing the capital entrusted to it by its shareholders. Many entrepreneurs instinctively focus on EVA when they have limited access to capital, however, it is easy to lose sight of the importance of the cost of capital as the business grows and gains increased access to capital. In this blog article, we explore the concept of EVA and why it is the best financial metric to focus on to create long-term enterprise value.

Economic Value Add is a calculation that subtracts the cost of capital from the net operating profit after taxes (NOPAT). The cost of capital is the amount of money the company must pay to access the funds it needs to operate and grow, such as interest on loans and the return required by its owners. By subtracting the cost of capital, EVA provides a clear picture of the value a company is creating for its owners.

Sometimes a business can increase its earnings while not necessarily increasing its enterprise value; which on the surface seems counterintuitive.  If increasing the value of the business for shareholders is the goal, then all earnings growth is not good growth.

So how can business enterprise value stall despite demonstrated earnings growth?  The simple answer is that the incremental earnings were not enough to cover all the operating costs plus the cost of capital (including the opportunity cost of the equity in the business).
 
EVA provides a clear picture of the return on investment for a company’s shareholders and allows companies to make informed decisions about investment opportunities and prioritize initiatives that will maximize long-term value for shareholders.  It also reflects the time value of money.
Unlike other financial metrics, such as revenue or profit margins, EVA is not influenced by accounting practices or one-time events. It can be used to guide spending/investments in R&D, advertising, new hires, incentive programs, M&A, etc. It encourages judicious investment in long-term value-creation strategies and measures progress on initiatives that most accounting metrics miss.

It also provides discipline on capital expenditures as the cost of capital changes over time. It is a reliable and consistent measure of a company’s performance over time, which is essential for creating long-term value.

Here are some practical ways to improve your company’s EVA.
1) Increase profits without tying up any more capital.  This can be in the form of improving margins and/or lowering operating costs or both if the total capital does not increase.  It encourages streamlining operations and investing in growth initiatives whenever the benefits exceed the cost of capital
2) Decrease capital without losing earnings.  Some possible options include:
            - Lowering inventory levels or increasing inventory turns
            - Shortening selling terms or improving collection practices
            - Negotiating better supplier terms or taking advantage of supplier incentives
            - Divesting redundant assets
3) Divest, liquidate or discontinue parts of the business, where the lost earnings are more than offset by the savings in the cost of capital.
4) Only invest (increase capital – capital expenditures PLUS working capital) in projects that provide a return that exceeds the cost of capital.
5) Reorganize the capital structure of the business to lower the overall cost of capital.
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In conclusion, Economic Value Add is the best financial metric to focus on to create long-term value. By focusing on EVA, companies can make informed decisions about investment opportunities, prioritize initiatives that will maximize long-term value, and create sustainable and profitable growth for their shareholders.

In previous blog articles, we have written extensively about many of the drivers that impact the value of a private business when it is sold to a third party.  Business owners that enter into direct negotiations with a potential buyer based on an attractive, but very preliminary offer, often find out that their business is not ready for a sale.  The earnings, sales, growth, products, markets, and facilities may be attractive, but there are underlying issues that are uncovered during the buyer’s due diligence process that sends them running or they attempt to “re-trade” the deal at a lower value.

Marketability drivers are aspects of the business that don’t necessarily add value but can dramatically improve the probability of closing a successful transaction.  They also increase the probability of receiving multiple offers when a well-run, competitive sale process is deployed, and therefore can indirectly enhance value. That is, more offers mean more choices, which equals a better negotiating position and possibly a higher enterprise value.

So, what are some of the drivers that impact marketability?

Outside audits and/or Quality of Earnings review
A business is much more marketable when it has clean financials without a host of “adjustments” or “add-backs” to normalize earnings.  Having at least a couple of years of audited statements can be important for some buyers and therefore increases its marketability, while reviewed statements are sufficient for others.  Audited statements will help ensure that the firm’s accounting practices are up to date and that the internal controls are up to industry standards.  In some cases, it may be advisable to hire an outside firm to conduct a “Quality of Earnings (QofE)” review. A QofE will help a buyer determine maintainable earnings by adjusting for one-time/non-recurring expenses and sales, owner-benefits, inter-company, and related shareholder transactions, etc.  Many buyers will require their own QofE to be completed during due diligence, however, if much of the work has been completed, it can make the business more marketable, the transaction process easier, and less likely to be derailed as items are uncovered.

Conflicts of Interest
Minimizing conflicts of interest in advance of a sale will help with its marketability, but business entrepreneurs often fail to recognize what might constitute a conflict of interest in the buyers’ mind.  Intercompany relationships are one area that should be reviewed and adjusted to market where necessary in advance of a sale.

Accounting and Enterprise Resource Planning (ERP)
It is critical buyers can understand the nuances of the business and how it operates.

An ERP system can offer several benefits to businesses, including improved efficiency, streamlined processes, better data management, and increased visibility on sales, customers, markets, etc. It can help management exercise more control over operations. It can also help organizations integrate and automate various business functions, such as finance, accounting, supply chain management, and human resources, leading to cost savings and improved decision-making.

A robust ERP program with up-to-date and professional accounting processes is essential in ensuring that the business is marketable. Some buyers will just walk if they can’t get the answers, they think are essential.

HR Practices
A company that utilizes best practices in HR across the organization is more marketable than a business that has limited capabilities in managing a growing workforce.  Best practices in recruiting, onboarding, training, development, compensation, performance management, cross-training, etc., with opportunities for promotions and personal development lead to high retention rates and a high intrinsic value of the business.
 
Processes/Systems/SOPs/Third-Party Certifications
Every industry has a litany of processes, internal and external audits, certifications, etc. that seem at times to add little value to the business but may be a necessary evil.  Many of these, however, give buyers an elevated level of assurance that the business is being operated professionally, and therefore many of these processes can increase a business's marketability.

Leadership, Succession, and Transition Plans
The leadership and management of a business are critically important to a buyer, however, providing more insight to a buyer on the business's succession plan at multiple levels within the organization helps build confidence in its long-term sustainability.

Environmental, Social, and Governance Factors
Businesses focused on reducing their carbon footprint, improving waste management practices, and resource usage are more marketable than those that make every attempt to skirt the rules and save costs. Likewise, a company's impact on society, including its labour practices, community engagement, and relationships with stakeholders is important to many buyers.

In recent years, ESG factors have become increasingly important to investors as they seek to invest in companies that align with their values and promote sustainable growth. Many investors believe that companies that prioritize ESG factors are more likely to achieve long-term success and generate positive returns.

A Written Strategic Business Plan
Buyers want to know where the business is headed and how the management team plans on getting it there.  Too many lower-middle market businesses rely on an unorganized, unwritten, let’s “see what we can do” type business plan, that works fine until you need to scale and need investment (either externally funded or funded from internal cash flows).  Taking key team members off-site for a couple of days of “deep strategic thinking and planning” and formalizing the outcome into a written business plan with key stakeholder buy-in, helps more potential buyers see the opportunity and therefore increase the marketability of the business.

Cross-border M&A deals between US and Canadian-based companies add complexity to the M&A process as well as the post-acquisition operation and integration of the target. Yet, with the right advisors, both US and Canadian-based companies can expand their growth prospects through acquisitions, widen their markets, and diversify risk by exploring cross-border M&A.

But before you start here are some items to consider:
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1. Understand the tax implications: Tax rules on cross-border profit distributions via dividends, royalties, or interest payments are regulated by the Canada-US Tax Treaty which outlines the rules for determining any requirement for withholding taxes. Generally, the treaty provides for a zero withholding tax rate on dividends paid by a Canadian subsidiary to its US parent if the US parent directly or indirectly owns at least 80% of the voting power and value of the shares of the Canadian subsidiary for a specified period. On the other hand, the general withholding tax rate on dividends paid by a US subsidiary to a Canadian parent is 15%. However, if the Canadian parent owns at least 10% of the voting shares of the US subsidiary, the withholding tax rate may be reduced to 5%. The specific rate and conditions may vary depending on the specific provisions of the tax treaty and the circumstances of the payment.

The tax treaty between Canada and the US, as well as the domestic tax laws of both countries, treat outbound and inbound dividends and other income distributions differently.
 
There are also significant differences in corporate income tax rates.  Canadian Controlled Private Corporations (CCPC) are taxed at much lower rates than non-CCPC companies and this lower tax rate status is lost if more than 50% of the company is US owned.

Companies need to consult with tax professionals to ensure there is a clear understanding of the countries’ tax laws and regulations, before pursuing a cross-border M&A strategy.

2. Regulatory and Legal Differences: The US and Canada have different regulatory and legal frameworks, but often operate under similar principles. Nevertheless, cross-border M&A deals must navigate these differences, including antitrust laws, securities laws, and labour laws.  These can vary by State or Province as well as at the Federal level.

For example, the acquisition vehicle options for M&A in Canada and the US are somewhat similar, but there are some key differences. It's important to note that the choice of acquisition vehicle will depend on various factors, including tax considerations, the nature of the transaction, and the goals of the parties involved. While Canada does not have LLCs and S-Corps, in some cases they can own Canadian subsidiaries but there may be many legal and tax considerations that need to be taken into account.  Often, US-based acquirers set up Canadian ULCs (Unlimited Liability Company) for their Canadian acquisitions as flow-through entities, however, there may be important differences in liability protection that needs to be considered.

Like the tax implications, it's important to consult with a lawyer and an accountant who has expertise in cross-border business transactions before proceeding.

3. Employee benefits and healthcare: The main differences between employee benefits costs to companies in Canada versus the US may vary depending on the specific benefits, but some general differences are:

a) Healthcare: In Canada, healthcare is largely publicly funded and administered by the government, while in the US, healthcare is largely private and employer-sponsored. This can result in higher healthcare costs for US companies.  Canadian companies often also offer health and benefit insurance that is either cost-shared with employees or paid by the employer to cover extended health care (dental, drug coverage, etc.) and other non-publicly funded health care costs.

b) Retirement benefits: In Canada, employers are required to contribute to the Canada Pension Plan (CPP) or other retirement plans (such as the QPP in Quebec), while in both the US and Canada, employer-sponsored retirement plans such as 401(k)s, or group pension plans are common, but not required.

c) Paid time off: Canadian employees are generally entitled to a minimum of two weeks of paid vacation per year (however paid time off rules vary by Province), while in the US, there is no federal requirement for paid vacation.

d) Parental leave: Canadian employees are entitled to a longer period of paid parental leave compared to the US, with up to 18 months of leave in some Provinces, while in the US, the Family and Medical Leave Act (FMLA) provides up to 12 weeks of unpaid leave.

e) Taxes: Canadian companies may face higher payroll taxes and employment insurance costs, while US companies may have higher healthcare and insurance costs.
It's important to note that these differences may not apply to all companies and industries and that regulations and benefits can vary by province and state within each country.

4. Currency Fluctuations: Currency exchange rates can significantly impact the value of cross-border M&A deals. Changes in exchange rates can create significant financial risks for companies on both sides of the border, when reporting income is in the “home” currency.  However, for businesses with already a significant commercial presence in the other country, acquiring operating business with expenses in the “importing” country can act as a hedge against significant currency fluctuations, Luckily, both Canada and the US have relatively stable economies (when compared to many other countries) and currencies.

5. Foreign Investment Regulations: In the US, foreign companies must comply with the rules and regulations set by the Committee on Foreign Investment in the United States (CFIUS), which reviews foreign investments that could potentially pose a threat to national security. In Canada, foreign companies must comply with the Investment Canada Act (ICA), which regulates foreign investment in a wide range of sectors and activities.

Both countries also have specific rules for mergers and acquisitions involving foreign companies, particularly those that could result in a significant loss of Canadian or US ownership or control. These rules are designed to protect national security and ensure that foreign investments do not compromise the integrity of key industries or pose a risk to national interests.

6. Integration Challenges: Cross-border M&A deals require effective integration strategies to realize the potential benefits. Successful integration requires alignment of business processes, culture, and technology. Sometimes companies fail to understand the differences in many of the operating regulations that are specific to each country.  For example, in Canada, many consumer products like food must have both French and English labels.  Despite the existence of a free trade agreement between Canada and the US, there also may be tariffs or other trade restrictions that may limit raw material supplies or trade in finished goods.

Cross-border M&A deals between Canada and the US offer significant opportunities notwithstanding these and other considerations. There are extensive business and cultural linkages between the two nations, and their economies are heavily linked. These connections can give businesses access to new markets, clients, and technological advancements. Cross-border M&A transactions can also aid businesses in scaling up operations and improving their position as industry leaders.
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In conclusion, cross-border M&A transactions between the US and Canada offer both opportunities and obstacles. Regulatory, legal, cultural, and financial risks related to the transaction as well as the post-acquisition and integration plan must be carefully considered by businesses before a cross-border acquisition is pursued. But, with the proper planning, strategy, and advisors, cross-border M&A can offer important advantages and aid businesses in achieving their growth goals.

Once you have decided to sell your business, the next big decision lies in “how” to sell your business. For most entrepreneurial-led, and/or privately-owned businesses, taking a “do-it-yourself” approach by negotiating directly with a single buyer rarely results in a positive outcome (unless it is under some very specific circumstances - see DIY pros and cons). By interviewing several M&A Advisors, it will become clear that it matters a lot about the type of sale process you choose to pursue. This blog article will highlight some of the key issues sellers should consider, once the decision to sell the business has been made.

First, let’s outline some the sale process options you will need to consider.  While everyone’s definitions of 1) a negotiated sale, 2) a narrow process, and 3) a broad auction process will differ slightly, we like to think of the number of potential buyers for each as, a “handful” for a negotiated sale, perhaps 20-50 in a narrow process, and perhaps 300 or more in a broad auction process. While all three approaches differ, they all include at least some level of competitive tension amongst buyers.

Choosing the right approach starts with gaining a clear understanding of the seller’s objectives and priorities.  There is a lot to consider.  For a quick review of the key questions we ask before recommending a process, see our seller’s priorities questionnaire.

Best buyer vs highest price
The best buyer may not be willing or able to pay the highest price.  Most business owners know some of the best potential buyers for their business, based on their viewpoint on the best strategic fit. This could be based on the buyers’ complimentary products, services, customers, markets served, etc.  If selling to the “perceived” best buyer is a higher priority than obtaining the best value, then a narrower, or even a negotiated sale process should be considered.  A broad auction, however, can uncover high-quality buyers never previously considered; some may be willing to pay top dollar and could be an excellent strategic fit.  It is amazing how many M&A deals are completed with an unexpected buyer.  The reality is that it is very difficult to gain detailed insight into what motivates a buyer to pursue an acquisition unless you allow them to articulate their strategy in a confidential dialogue.

Confidentiality
Maintaining confidentiality from the outset through to close is paramount to ensure employees, customers, and suppliers don’t defect and create obstacles to correct if a deal doesn’t close.  When competitors become aware of a potential sale, they can try to take advantage of the market uncertainty that arises from the M&A process as well.  No NDA is foolproof, and logic would dictate that the risk of a confidentiality breach is higher with a broad auction process than with a negotiated sale. Before deciding on what type of process to pursue, the sensitivity of the business to a confidentiality breach with each of its important stakeholders should be considered.  Some processes are defined as broad because a lot of Private Equity Groups (PEGs) and/or financial-type buyers are included.  A confidentiality breach by a financial buyer is typically less impactful than a breach by another industry participant.  Therefore, it is not only the type of process that should be considered but also the make-up of financial vs strategic buyers that are included in the process.

It is also much easier to stagger customized and/or sensitive information flow to potential buyers in a negotiated sale and a narrow process than it is in a broad auction process.

Speed
If closing a deal quickly is a high priority, sometimes it may best to focus on a handful of the best buyers and open a confidential dialogue.  However, under some circumstances, this can backfire.  Large buyers, such as publicly traded companies, often move at a “snail’s pace” when it comes to M&A (unless it is an opportunity identified and pursued by the executive team or board).

A narrow or broad auction process usually involves a two-step bidding process.  Potential buyers are provided an opportunity to provide an initial bid, which can lead to further discussions with a subset of the best initial candidates, who then may get an opportunity to submit a more detailed Letter of Intent (LOI).  As such, the marketing material, data room, and preliminary Q&A sessions must all be completed before the real negotiations begin, which can add time to the process when compared to a negotiated sale.

Flexibility
Sometimes business sellers don’t know what they want but will know it when they see it.  In this case, the M&A Advisor’s role is to focus on creating options for the seller to consider.  This usually means going out to a broader market that includes financial buyers, foreign entities, companies in adjacent industries, etc. Flexibility on the type of deal structure, equity rolls, sale or retention of assets such as real estate, transition periods, etc. can drive value and open up opportunities for the seller that were never considered at the onset of the process.

This is often the recommended approach for highly marketable businesses, that are well-run, and are anticipated to capture high valuations from the market.  If the business and the seller's flexibility are conducive to a PEG recap (see here for desirable criteria), a broad auction process should be seriously considered.

Of course, like everything in M&A, the choices you need to make can’t be simplified down to a blog article.  The key is to look for an M&A Advisor that will listen carefully to you and your objectives and guide you to the right process for your situation. That means working diligently to understand your business, your market, and discover potential buyers' motivations, etc. to design the best process for your situation.

Taking time to brainstorm with team members on how to improve the business can take many forms.  One useful technique is the “Start…Stop…Continue” exercise.  It is a very simple process whereby each team member is asked to list a few things they think the team should start doing, stop doing, and continue doing.  Usually, the facilitator will provide some guiding questions beforehand to get the ideas flowing.

A few leading questions for the “Start” session could be:

• If money wasn’t a factor, where would you invest or what positions would you add to the team? … or,
• What projects should we initiate to grow topline sales the fastest?

Compiling the list and going through a priority-setting process should lead to two or three key initiatives to implement.

Deciding on the activities that do not add value to the business and therefore should be stopped can feel like a breath of fresh air for the team.  Taking a hard look at all the team activities that don’t fit with the core purpose of the business should be part of the process. 
 
Some potential questions could be:

• What are the daily or weekly tasks that you “mentally” place on the bottom of your “to-do list” and why?
…or,
• What tasks are completed inconsistently and what is (or was) the impact?  If it had a minimal negative impact, then why keep doing it?

From a customer’s perspective, if value equals benefits minus costs, perhaps there are unnecessary customer costs that can be reduced or eliminated.  Discontinuing services or processes can free up resources to focus on priority initiatives identified from the “Start” exercise.

For the “Continue” part of the exercise, it is important to identify the initiatives that are working well and to figure out ways to do more of them.  How are you measuring progress on these initiatives and how can the team dedicate more resources to accelerate the success?

Perhaps there are examples of how the team “wowed” a customer or helped turn a bad situation into a win.

Sometimes, changes can be made to how critical processes are undertaken through a “Start…Stop…Continue” exercise and meaningful improvements can be made. 
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You should look for at least a few small wins each time you execute the process to gain buy-in and momentum for the next session.  Of course, if nothing changes after the exercise, team members will quickly disengage from future sessions.

Almost every entrepreneur considering a future sale of the business is interested in knowing what comparable businesses are selling for and what the typical multiple of earnings (EBITDA) are for their industry.  However, there are many variables to consider when comparables are used to estimate enterprise value, many of which can lead to inappropriate assumptions about the value of the business.  While comparable transactions can be one component of a pre-sale valuation, they should always be used along with other valuation techniques.  In the end, the actual multiple a business trades for depends on 1) the prevailing market conditions, 2) the nuances of the business and the industry it participates in, and 3) how the business is marketed and sold.
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The number of direct comparables.  For companies in the lower middle market (Enterprise values of between $10 million and $100 million), there are often very few direct comparables, let alone those with a similar growth or profitability profile.  Typically, data on EBITDA multiples come from databases that extract information from press releases and from disclosures made by publicly traded companies when acquiring private companies.  Under most circumstances, there is no reason for private companies to disclose the purchase price and/or terms of any companies they acquire, let alone any details about the businesses themselves.  Some databases allow companies to extract financial data on a no-names basis in turn for submitting financial M&A transaction data, however, this only helps to guide users with average multiples, the median multiple, and/or ranges of valuations in specific industries/segments.

Timing.  The prevailing market conditions for the general economy and the specific industry in which the company participates are in constant flux.  This means that valuations vary over time based on competitive factors as well as external factors such as the cost of money.  The timing of comparable deals is especially sensitive in cyclical industries.

Size.  In general, larger companies trade at higher multiples so it is important that when researching comparables, companies of similar size are used, or the transaction data is size adjusted. Since much of this data comes from high-profile deals and/or when publicly traded companies are required to disclose transaction details to shareholders, this usually means that the published, or publicly available transaction data is scarce for smaller companies in the lower-middle market.

Location. Some businesses trade at higher multiples simply because of where they are located.  Differences in labour laws, tax incentives and rates, compliance requirements, average wages, skilled labour availability, etc. make it very difficult to make valid comparisons between deals in Europe and Canada/U.S. for instance.

Public vs private.  Publicly traded companies trade at higher multiples, not only because they are typically larger, but also because of the liquidity it provides shareholders.  Shareholder liquidity is usually much more complicated and expensive for investor holdings in private companies.

EBITDA multiples period.  Often when comparable data is available, it is not clear whether the EBITDA multiple is based on the trailing twelve months (TTM), the last fiscal year, or a forward multiple on projections. Some public companies will only report the multiple after synergies to help gain support from analysts and shareholders that they are not overpaying for an acquisition. The standard protocol calls for EBITDA multiples to be based on TTM, but there is nothing requiring anyone to comply with this standard.

EBITDA Adjustments.  It is normal for business buyers and sellers to adjust the TTM EBITDA based on their judgment of maintainable earnings under new ownership.  Normally, there is little if any hard data on what, or if any EBITDA adjustments have been included in a reported EBITDA multiple.

Assumed debt/liabilities.  Most deals are completed on a cash-free/debt-free basis, but that may not always be the case.  If liabilities, such as a Line of Credit, are assumed by the buyer, they may report the price they paid, along with the TTM EBITDA, but it may not be reflective of the Enterprise Value (equity plus debt) as a multiple of EBITDA.

Minority/majority deals.  Generally, investors expect a discount on an investment when only taking a minority position and this may not be fully disclosed.

In conclusion, there are a lot of variables that limit the value of comparable transaction data as the primary means of estimating a company’s enterprise value.  That is not to say it doesn’t provide value – it must simply be used to supplement other valuation techniques.
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There are also a lot of comparable data points that Investment Bankers and M&A Advisors have access to through their experience but are not available to the broader market.  For example, when bidding on a company in a competitive process, buyers and their advisors get a sense of the multiple they need to pay to remain competitive.  On sell-side engagements, M&A professionals are given the opportunity to observe bids from multiple buyers, giving them a much deeper appreciation of expected trading multiples in a given industry.  This insight is much more valuable than any database that reports on EBITDA multiples, as the nuances of the business and the industry are understood.