ISO standards and our place in the global development community

If there’s one thing I’m particularly proud of in looking at the success of Mizrahi Developments, it is the high standards with which we hold all aspects of our operation. We are a private development company and ultimately there are business goals we set for ourselves and we take those very seriously.

Beyond the corporate imperative of running a profitable enterprise, I have always stressed the need to bring value to communities in which we are privileged to work. That’s one reason why we place such a high premium in our commitment to our ISO 9001 certification.

For those who don’t know, ISO stands for International Organization for Standardization, a worldwide federation of National Standards. We are among the small but growing number of companies in Canada to align with like-minded enterprises all over the world in demanding more from ourselves. Founded in Geneva, Switzerland in 1946, ISO 9001 is an International Quality Management System (QMS) Standard. Its aim is to help a wide range of organizations ensure that they meet the needs of customers and other stakeholders, while also meeting statutory and regulatory requirements.

ISO 9001 is based on internationally recognized quality management principles set out by the International Standards Organization (ISO). It first became popular in Europe and has since grown to become a global standard.

As I’ve described in the media in the past, ISO is a self-imposed fitness test that Mizrahi Developments has adopted in order to ensure we are not just meeting, but surpassing the expectations of our customers. My point is, it’s not enough to simply do what is required — achieving true excellence means we as a company must strive to be the absolute best we can be in terms of running at superior levels of competence and developing real estate projects of superior quality and construction.

I would encourage other entrepreneurs and business leaders, regardless of the product or service they provide, to look seriously at this quality management system because ISO 9001 certification is recognized and respected throughout the world. Beyond that, it sends a message to clients and colleagues that you are serious about going above and beyond what’s merely expected of you.

Importantly, over the years, our adoption of ISO standards has allowed Mizrahi Developments to streamline our custom construction process by codifying all potential design changes. That creates a roadmap for us to follow and allows us to develop projects as efficiently and cost-effectively as possible. It also allows us to meet timelines and budgets and, finally, provides reassurance to future residents of our buildings that there’s a third party auditing our process and ensuring we are always exceeding standards.

All to say, we are here for a relatively brief period of time. When that time draws to a close, we should consider the commitment and contribution we’ve made to our communities. In many ways, ISO is part of our commitment. I strongly believe in adding value and enriching neighbourhoods and our communities. If there’s a greater, more noble goal to strive for, I don’t
know what it could be.

Workplace Health and Wellness Declining Trend

Annual survey of fitness professionals indicates that workplace health and fitness is declining. Researchers believe that as time passes wellness programs may become more important than ever before.

The American College of Sports Medicine recently published a new survey showing that health and fitness promotions are on the decline in the workplace; or at least appear to be.

This is the 11th year of the study, which is completed on an annual basis to help health and fitness professionals decide which programming and business decisions they need to be making. Workplace health programs were number 12 on the list of priorities last year and this year they’ve fallen all the way down to 16th place.

The survey was responded to by people in the health and wellness industry. This includes personal trainers, health and fitness specialists, clinical professionals and also registered dieticians. The researchers behind the study got responses from across the world including Australia, the UK, Canada, India, Germany, Singapore, Italy, Venezuela, Taiwan, Jamaica, Switzerland, South African, Greece, Bermuda, Finland, and the USA.

The study says that worksite health promotion has become a trend for many different programs and services that are used to evaluate the health of employees, health care costs, and also the productivity of workers. After a need has become established the worksite health promotions are put together by professionals to address these needs; such as creating programs to help people stop smoking and lose weight.

An ACSM table that tracks the worldwide trends over the past ten years (for 2007-2017) shows that these workplace health programs have actually never managed to make it to the top 10. Researchers did not ask those taking the survey why they felt that workplace health and the other trends on the list may have become more or less important.

The study did indicate that despite how poorly health and wellness in the workplace performed this year it will be more important in the years to come; particularly in the United States.

The study noted that changes in healthcare in the US, along with rising prices of healthcare that are occurring all over the world, worksite health promotion programs are going to become more important as time passes.

While the study suggests that there is currently little focus in the workplace most of the trends from the survey could be incorporated into a workplace wellness program. The top ten health and fitness trends of 2017 are:

  1. Wearables

Wearable technology includes things like activity trackers, smart watches, GPS tracking devices, heart rate monitors and smart eyeglasses which are designed to track activity and show maps.

  1. Body Weight Training

Body weight training is when one uses the weight of their body for resistance training. As such it involves far less equipment and is a much cheaper way to exercise while still being very effective. It also involves raising the heart rate and burning fat and calories by using just the weight of your body.

  1. High-Intensity Interval Training

High Intensity Interval Training is where you train at a high intensity for a few minutes before slowing down or resting to recover. A HITT program will typically take less than half an hour to complete making them a convenient way to get in some intense exercise. Some people consider HITT to be the most effective form of exercise there is.

  1. Educated Fitness Professionals

The trend of trained and accredited fitness professionals is continuing because of third-party accreditations on offer by national accrediting organisations for professionals in health and fitness and clinical exercise programs. There is also a registry of exercise professionals so people are finding it easier to become and hire qualified fitness professionals.

  1. Strength Training

The younger clients in commercial cubs and community programs alike almost exclusively weight train. There are also many people in gyms from every walk of life, from young men and women to older people dealing with chronic illnesses that have a keen focus on using weight training to build or maintain muscle and strength. Strength training can be used to alleviate a number of health conditions through rehabbing and strengthening the muscles and joints.

  1. Group Training

Group training sessions are created to motivate and encourage people at every fitness level to effectively exercise. The trainers at these classes will have leadership qualities and skills they can use to help everyone in their class achieve their own fitness goals. There are many different group training programs out there including aerobics, water aerobics, bicycles, and dance classes such as Zumba. This model has been adapted from that perfected by online training companies such as CBT Nuggets.

  1. Exercise is Medicine

The idea of “Exercise as Medicine” is a health initiative with a global reach. The idea behind the initiative is encouraging health care providers such as physicians to make physical activity a part of the treatment plan for patients and referring these patients to exercise professionals.

  1. Yoga

There are many different varieties of yoga and they are all pretty popular. These variations include Power Yoga, Yogalates and Bikram Yoga, which is more commonly known as “Hot Yoga”. There are many instructional videos and books on the subject and there are an ever increasing number of certifications and certified professionals for the different forms of Yoga. Yoga is enjoyed because of how effective and efficient it is. Most people don’t realise how intense yoga is until they try it for themselves because it looks like barely any movement is involved.

  1. Personal Training

Professional personal trainers are keen to see the professionalization of their place within the industry. These personal trainers can be employed to run a community-based program or they might be employed commercially, as part of a wellness program, as part of a medical fitness program, or they could be self-employed and work for whoever is paying them that day.

  1. Exercise and Weight Loss

Combining exercise and weight loss places a heavy emphasis on restricting calories and combining this calorie controlled diet with exercise. The 2017 survey says that organisations; in particular for-profit organisations in the weight loss industry, are going to continue to incorporate regular exercise and calorie-controlled diets for the purpose of losing and managing weight.


Travel and Cyber Security Smarts

Criminal hackers have their eye on travelers in hotels around the world. It was recently revealed that a sinister program called DarkHotel has been in use for the past several years to hack into traveler’s accounts while staying at a hotel. It not only accesses personal information, but can introduce malware into a hotel’s internet system, causing havoc with things like payments and reservations.

Traveling for business or for pleasure can often leave a person tired and slightly disoriented — a ripe target for the ever-vigilant cyber criminal or mischief maker. We’ve all been warned against using public internet connections to transmit personal information, but sometimes there isn’t any other option. Tired travelers tend to let their guard down. Here are some tips to help avoid the most egregious hacking schemes while on the road:

Get your software updated before every trip

Adobe Reader and Windows are constantly on the lookout for vulnerabilities in their programs. Make sure you don’t hit the road without first getting the latest updates. This can save you from having to struggle with a malicious software attack while away from home. Not a pleasant way to spend a vacation . . .


Always use a Virtual Private Network when traveling, and most especially if you are forced to use a public internet connection at the airport or hotel. Dell SonicWALL specifically enables secure connections from remote locations, which is ideal when traveling.

Use the vendor’s website to install updates

A common ploy of cybercrooks is to send an update notification to your computer, with a button to click on to install. Most of these notifications are legitimate, but some are not; they are intended to introduce malware. So always go directly to the vendor’s website to have updates installed. Especially when you’re when you’re booking travel online with a service such as JustFly or any other travel accommodation service.

Check the access point

WiFi hotspots in places like lobbies and conference rooms may have a rogue doppelganger that can snoop on your personal information, so make sure you know the exact name of the legit WiFi service being offered.

Create your own cellular network hotspot

This can be done with most smartphones. This will discourage the amateur hackers, but the real pros can still get into your files, so it’s best to also use VPN.

Think real hard before using public access

If you’re just sending a message to your spouse or business associate that you’ve arrived safe and sound, public access WiFi is okay. But for sensitive information, just assume that any public access WiFi site has already been compromised and avoid using it at all costs. A gram of prevention is worth a liter of cure.


To guard against the bad guys that may be on the same network you’re using, use a travel router that connects with Ethernet. This will back up your own laptop’s firewall (which is vulnerable to most professional hackers) with a stronger and more sophisticated firewall.

Physical precautions

Never leave your computer open in your hotel room when you are not there. The maid has a key to your room, and perhaps an insatiable curiosity about who you are and what you’re doing.

Laptops and mobile devices can be lost or stolen at airports and other busy public transportation hubs. Never leave yours unattended when out in public. Get a GPS chip installed on your device, so if it is mislaid or swiped you can have it tracked.

And the most basic precaution of all — many dishonest people can read lips and carry devious devices to capture your pin number or password simply by sitting close to you. So keep an eye peeled for anyone who seems too much interested in what you’re typing or saying.

Expect the best, but plan for the worst

Hopefully your trip will have been pleasant, restful, and profitable. But just assume that your password(s) have been hacked while traveling; once you’re back home change them immediately — despite the jet lag!

5 Courses Every Business Owner Should Consider

If you’re starting a business or you currently own a business, you should always be looking for ways to increase your knowledge and add to your skillset. This will make you a more effective leader and help to transform your company into a more effective enterprise. Below are some of the most important courses every business owner should consider.

Computer Skills

In today’s business world, you have to be computer literate. Most businesses are turning to digital communication, which means a paper based offices are now a thing of the past. A modern business owner has to know how to use the internet, email, word processors, spreadsheets and much more. If this is something that you’re struggling with start small. Learning Excel by reading online articles (For example this article “introduction to Excel) is a great first step towards becoming more computer literate and effective in your business.

Leadership and Management Skills

As a business owner, you’re effectively the ‘captain of your own ship’. This ‘ship’ will sink or succeed based on the decisions you make, so it’s vital to learn how to become a more effective leader and how to manage each area of your organisation properly. A range of leadership and management skills courses provide you with the necessary tools, so that you are able to create better business strategies, plan more effectively and manage projects and day-to-day work in your business.

Communication Skills

Failure to communicate is a serious problem in many organisations. This is a problem that can only be solved by the owners and senior management of a company, who must lead by example. If they don’t have the necessary communication skills themselves, there’s very little hope that any improvements in communication can be made lower down in a business. Hiring communications experts to train everyone from the top down in a business will make it a more efficient place to work and there will be less confusion.

Offline and Online Marketing

If nobody knows about your business and what it has to offer, the business won’t last very long. This is why it’s essential to find out as much as possible about the latest offline and online marketing options available. Different marketing methods suit different companies. In some instances, traditional marketing may be extremely effective, while in other situations online marketing could prove to be a better way to reach out to potential customers and shoppers. A business owner needs to be fully aware of the options available, so that they can spend their marketing budget wisely.

Accounting and Finances

The success of a business depends on how healthy its bottom line is. Most businesses hire financial professionals who deal with this aspect of a business. However, a business owner Must understand this area of their business, so that their decisions can be based on their understanding of the finances, as well as the advice given by accountants and other financial professionals.

Some business owners never increase their knowledge or add to their skillset. As a result, many of these people fall behind their competitors, who are willing to go the extra mile. However, deciding to take some or all of the courses above has the potential to make your company a leader in your industry.

Why Knowing When and What to Outsource is a Vital Skill for Small Business Owners

If you are looking into starting your own small business, it may seem like there are hundreds of skills you will need to pick up to be able to run your new venture competently. From people management and accounting to IT and marketing, there may be a lot of things outside of the scope of what your business actually does for its clients or customers which need to be managed.

You Don’t Need to Do It All

However, in reality, you don’t actually need to become proficient in all areas of your business to make it a success. In fact, it is often better if you don’t try and do everything yourself and instead focus on what you are good at, and on the overall vision and drive of your enterprise. This is why knowing when and what you should outsource to other businesses is one of the most important skills you can have as you start out in business.

The Benefits of Having Far More Staff at Your Disposal Than You Can Actually Hire

If you have time to do everything yourself, or even to learn how to do everything needed to run a business, either your business is suffering for it or you are personally, from overworking. Neither of these are good things. Of course, you could hire people, however many of the tasks don’t need someone on them full time, and other things, like if you need a customer service helpdesk, require an investment in infrastructure as well as staffing. Outsourcing to third party companies like Pro Back Office gives you access to as many fully trained, expert staff as you need – but you only have to pay for the time they spend working for you and they are already equipped with the tools and software, as well as office space, that they need.

Small Businesses Are Usually Part of an Ecosystem

Whether you plan to run a business that serves other businesses or one which markets to the general public, you still need to appreciate that small businesses tend to operate within an ecosystem, rather than in isolation. A small business that does web design will have other small businesses as its clients, but it in turn will use small businesses for things like accounting. Being part of this web of businesses benefits everyone, as you make contacts and it can often be the case that your suppliers can also become customers, or can recommend you to the other businesses they work with. This is hugely advantageous, however can only be achieved if you take a step back from trying to do everything yourself.

For some things, you may outsource to large businesses who can provide you with lots of staff, whereas for others you might choose small businesses you can partner with. Either way, being open to outsourcing will make your business better, a

The Impact of eIDAS

This past July European Union regulation #910/2014 became effective. Known more commonly as eIDAS, it streamlines e-signatures along with e-verification for commercial transactions on the continent. It is a complex regulation and will have some far-reaching effects on legal professionals and their legal tech vendors. These are 3 aspects of the new regulation which all legal professionals should take note of:

E-signatures vs e-seals

One of the most important changes will be in redefining e-signatures, which are not allowed to be used by the legal profession in approving documents that are signed by a client. As of July, legal professionals will be using e-seals for verification of the origin and integrity of documents.  They can be executed by third parties on behalf of a registered attorney.

According to Richard Creighton, a research secretary at Recent Legal News: “This regulation will create a real distinction between a real person and what is known as a legal person. Thus the implication of an e-signature for certification and confirmation of the content of a document, while the e-seal will be used primarily for confirming document validity.”

He adds that the intent is to clarify the status of the person who is doing the e-signing of a document, so it is evident they are signing as a real person, which certifies the content of the document.

Technical standardization

Since there is very little technical standardization of eIDAS, the process of executing and certifying any digital signature might become cumbersome. As an example, encrypted certificates may be stored on different physical devices from the one e-signature.

“An easier way of understanding the situation is as a notary-type process. To have a digital certificate in the most standard sense, you would have to actually show up at a physical office to verify the identity” says Adele St. Rogers, general counsel for Inkblad Systems.

Rogers states: “Although the regulation does simplify the legal usefulness of the e-signature, it also creates some further complication with the underlying technology of the platform as well as the systems that now form an integral part of the whole e-signature process.”

This would also include enterprise systems such as sales force automation as well as human capital managing. Along with software for word processing and the various document format reading apps. It can get messy, what with languages, formats, definitions, and multiple protocols.

However, the Cloud Signature Consortium hopes to draft a complete set of technical standards agreeable to all parties by the end of this year.

Legal standardization — with wiggle room

Each member state with eIDAS can vary the application of e-signatures, within certain broad boundaries.

Each member state has the ability to regulate and impose other types of e-signatures and trust services that go beyond the scope of eIDAS within their own boundaries. E-signature types may vary from one country to the next.

Robert Larrabie, a consultant for CPA and MBA, says: “The way to look at this is exclusions and restrictions in using e-signatures are normally not going to be a part of any e-signing directives, laws, or regulations.”

Most perplexing, perhaps, is the fact that the laws of each member state can decide if and when seals, time stamps and electronic signatures are admissible on electronic documents, despite the fact that eIDAS mandates their blanket legality.

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What makes a small business successful?

I had the opportunity to ask a man who owned an HVAC (heating, ventilation and air conditioning – you always wondered what the ‘V’ was for didn’t you … me too) business with a dozen or so employees, including his wife. His answer was ” That’s easy – great service and find your niche”.

I was reminded of my first foray into business. A neighbor was studying commerce at Western and had started a window-washing business. He knocked on my door and asked if I might be interested in washing storefront windows on the main street of Oakville. He would collect the money every couple of weeks from the stores and hopefully grow the business by going door to door and soliciting potential customers. I got paid by the window and made something like $50 for a Saturday, not bad for a teenager in those days. He made about the same and the relationship worked for a while.

Here’s the thing, I was the one washing the windows and I was the one that – in rain or shine, suffocating heat or freezing cold – was there. Shopkeepers saw that I was consistent and dependable and asked me to wash their windows. Part of the deal I had with my neighbor was that I could keep the proceeds of newly-generated business that I brought in myself. Soon it grew to exceed what my neighbor was paying me.

Naturally my neighbor discovered my success. He’d walk into a store to garner business and lo-and-behold I was already washing the windows. You see, when the weather was tough he was nowhere to be found, I was. He wasn’t providing the service, I was. I had the relationship.

He fired me. So I bought a bucket and squeegee and the next Saturday set out to start my own business. After a couple of months my neighbor was out of business. Over the next year I quadrupled my income. Over the next few years the business put me, and my brothers and sisters, through university.

The HVAC owner talked about his niche; water-based heating/cooling systems for condos. My niche was storefront windows. I’m always amazed when I pass a strip mall and see two dry-cleaners virtually side-by-side. Really? Two so close? What were they thinking? Then I see a sign in one that says ‘Alterations’ and in the other that says ‘2-for-1’ and realize that they too have a niche and provide unique services.

There’s a lot of niches and a lot of service out there. Small businesses – less than 100 employees – make up more than 98 percent of all firms in Canada. They created more than 3/4 of all private jobs from 2002 to 2012, a little over 100,000 jobs each year. Small wonder then that small business is the key driver of Canada’s economy. It’s not taught in school either, except the school of hard knocks.

Plan Your Business Exit

Do you have a plan in place to ensure you get a great price for your business should you become sick, disabled, die or when you decide to retire?


Why you need to plan ahead

If you own a business that’s growing or at least making you a decent living, chances are it may be worth a fair deal and quite possibly represents one of your most valuable assets.  So to ensure you get paid what it’s worth if you intend to sell it, or to minimize taxes on passing it to one or more of your children, you need to plan ahead for that day.

And since your ‘exit’ may not be at the time of your choosing – should you become sick, disabled or die, you need to plan now!

Without a succession plan secured with a Buy-Sell Agreement or a Shareholders’ Agreement, your business might:

  • not survive your death,
  • survive but be worth substantially less as your intended successor chooses not to pay a ‘high price’ for your business,
  • survive but materially hurt as customers are taken by competitors or ‘stolen’ by disenfranchised employees.

Your planning should consider the business acumen/capability and desires of your family members and employees in addition to your needs.  This can affect who you might sell to – be it family members, a partner, key employees, or even a supplier, customer or competitor.

You might even find that the most profitable solution might be to “grow” your own successor.  By hiring a younger person with the right skills, similar integrity as yours, and working closely with them for a few years, you’ll increase the odds that you can dictate a premium price.

The more time you have to plan, the greater the chances you’ll get more money after tax.  It takes time (read years) to find the best successor who is willing to pay the price you want, establish a Buy-Sell Agreement or Shareholders’ Agreement, fund the agreement to guarantee payment to your family should you die, get the successor up to speed with your business so that he or she has the skills needed, and ensure the structure will qualify for a tax effective transfer.

Selling assets or selling shares?

When you sell your incorporated business, you’ll have to decide between two general approaches.  Either you can have the corporation sell assets of the business, or you can sell shares of the corporation.

1. Taxation on the Sale of Shares to an Arm’s Length Party

If you sell the shares of the operating company, the disposition of shares results in a capital gain or loss.  The amount by which the proceeds of disposition exceed the Adjusted Cost Base of the shares is a capital gain; one-half of the capital gain is a Taxable Capital Gain (and this amount is taxed like investment income).

If your shares are held by you personally and are considered “Qualified Small Business Corporation Shares”, “Qualified Farm Property” or “Qualified Fishing Property”, up to $813,600 of your gain may be exempt from tax.  If your Family Trust holds these qualifying shares, it may be possible to multiply this exemption by allocating capital gain proceeds amongst beneficiaries such as you, your spouse, adult kids, and parents.

Your capital gains exemption is reduced, however, by investment losses.  The amount that your exemption is reduced by is the Cumulative Net Income Losses (CNIL) over all previous years.  The CNIL itself is increased by these amounts: interest costs on investment loans, carrying charges and interest on any business that you do not have direct control over, losses on partnerships or co-ownerships, rental or leasing losses and capital losses deducted versus capital gains that aren’t eligible for the exemption.  The CNIL balance is reduced by investment income you have received over the years including interest income and dividends.  So, you might plan to clean this up by taking relatively low cost dividends over a few years.  The exemption may also be restricted if you ever claimed an Allowable Business Investment Loss (ABIL) in which case you need some capital gains that are taxable.

 2. Taxation on the Sale of Assets to an Arm’s Length Party

No capital gains exemption is available if you sell business assets.  So from your point of view, it’s better to sell company shares.  If you sell the assets from your company, the proceeds from the sale are taxed inside a company.  You’ll also have GST/HST sales tax on asset sales.  You then have to pay tax a second time on withdrawals from the company.

How the proceeds are taxed depends on the type of assets sold and the income generated.  If you are selling depreciable assets, such as equipment, this results in recaptured depreciation if the sale proceeds exceed the Undepreciated Capital Cost (“UCC”) up to the original purchase price, thereafter you’ll have a capital gain.  Recaptured depreciation is included in income and taxed as active business income.  If sold for less than UCC, one has a deductible terminal loss.

The sale of non-depreciable non-inventory assets, such as land and building or shares of an operating company, result in a capital gain equal to the sale proceeds less Adjusted Cost Base.  One-half of capital gains is included in income and taxed as investment income (assuming it is on account of capital and not as an inventory item being sold).  The non-taxed half is added to the Capital Dividend Account where one might elect to pay out a non-taxed capital dividend.  The sale of land may result in land transfer tax.

Gains on the sale of intangibles and goodwill are also included in taxable income at a 50% inclusion rate; the taxable portion is taxed as active business income as opposed to investment income.

The type of income (i.e. active business income versus investment income) and type of corporation (for example, a Canadian controlled private corporation (“CCPC”) versus a non-CCPC) determine the corporate tax rate.

If you are trying to sell your business, the buyer may prefer to purchase assets which is usually much cheaper.  The buyer gets a higher cost on depreciable assets which will help generate more Capital Cost Allowance (CCA) or tax depreciation to offset future income.  Buying assets and not the shares is less risky to buyer as it doesn’t include your business liabilities or tax risk of potential future reassessments.

Preparing your business for sale

Having your accountant structure your ownership and cleaning up the company for sale at least 24 months in advance so it qualifies for the qualified small business capital gains exemption is just one aspect of preparing your business for sale.

You might also take steps to prepare your business so it’ll command a higher price.  For example, all of your client knowledge and details in running the business smoothly needs to get put on paper (or even better into a computer database).  If your business can be run with little or no involvement by you, then the business is worth more as there’s less key person risk.

You might also be able to increase your sales price if you strengthen its competitive position (or competitive advantage) – like operating profitable business niches with little to no competition or developing the business so that it is the lowest cost competitor.  In addition to the niche business potentially being very profitable, it might also have higher odds of transition success – where customers have little other choice to buy products or services from your business.

If your family business has more than one range of business operations, you might find that splitting it into logical focused businesses and selling each piece to the highest bidder might be more profitable than selling the whole pie to just one buyer.

When to sell?

Deciding on the best time to sell your business can be difficult.  But generally you should be able to command a significantly better price if you sell when business prospects are good and you’ve got a few years of great historical financial results.

For example, if you forecast growth of 20% and can show for the last three years 20% year over year growth, you have a good case for a premium price that reflects the prospect of future growth.

Another option might simply be for you to hold onto your business as long as you can manage especially if multiples for your industry are low.  But if this means the business isn’t well looked after and customer service deteriorates, your selling price could be accordingly affected.  So, you might end up working a few extra years and not be ahead financially.

The price

One common problem small business owners have is that of not being able to objectively arrive at a fair price.  That’s because there may not be a “stock market” or commonly known industry rules of thumb to tell them the value of their business.  So any offer that isn’t a premium offer for their baby may seem too low.

Rules of thumb used in your industry, if available, may be a helpful starting point to get some ballpark basis of worth.

A business valuator might be able to improve on this rule of thumb estimate or might possibly help bring the buyer and seller together to agree on valuation principles.  Four common valuation techniques used are:

  • Comparable Company Analysis – this is an attempt to measure value by employing the market values of public companies possessing similar attributes to your business;
  • Comparable Transaction Analysis – this is similar to the previous technique except companies used as models are those that have been recently bought or sold;
  • Discounted Cashflow – here the worth of the company is based on the total amount of after-tax cash it can generate (usually the most expensive price); and
  • Liquidation Analysis – here the worth is derived through selling off assets less the cost of satisfying debts (usually the most cheapest price).

From the amount determined based on one or a combination of the above techniques, there may be one or more valuation discounts applied such as:

  • Lack of marketability discount – this applies to closely held businesses where there is virtually no market;
  • Minority interest discount – this applies to where a buyer purchases a minority interest (less than 50% interest) in the business and doesn’t end up with control;
  • Key-person discount – this applies where the company’s success is dependent on a key person and the loss of the key person would result in adverse consequences.

With a valuation, the assumptions used can have a drastic impact in the resulting estimate of value.  So it’s important that both the buyer and seller are in agreement with the assumptions or you might end up wasting your money on the valuation.

Earn-out Arrangements

Carefully structured, an earn-out arrangement can be a win/win in that the seller likely receives a higher value for the business while the buyer minimizes the risk of goodwill impairment and obtains favourable internal financing.

And if you don’t offer an earn-out, you’ll likely eliminate many prospective buyers who’d be more than willing to pay a premium.

Converting part of the business value to tax deferred proceeds

For a larger business, the use of an Individual Pension Plan (“IPP”) or a Retirement Compensation Arrangement (“RCA”), could help you save a substantial amount in taxes by spreading taxes out over several years or by being able to shift part of the company value to tax deferred assets.

An IPP can be thought of as a super RRSP.  In most cases, IPP contributions can be substantially higher than RRSP contributions – possibly more than double what you’d otherwise be able to save in an RRSP.

Should business liability be an issue for you, an IPP comes with creditor protection (note that there is some degree of creditor protection through provincial legislation for RRSPs and RRIFs).  Although an IPP has setup fees and maintenance costs, for some people, the added savings and creditor protection are well worth the costs.

An RCA might be used to spread proceeds over several years.  It might be especially of value where you are considering becoming a non-resident and take up residency in a lower tax jurisdiction.

Either or both of these techniques should be considered many years in advance (read more at least 10 years), in order for the real power of these tools to be spectacularly effective.

Spreading the gain over time – the Capital Gains Reserve

When you sell your business, you might find it tough to get all of your money up front – it might instead be spread over a number of years.

So you might consider offering the buyer financing that may be more attractive than might otherwise be available through traditional bank financing.  And in the process you might receive some tax relief through a capital gains reserve.

This reserve allows you to bring the capital gain into income over a maximum five-year period.  Without the capital gains reserve mechanism, you’d be liable for tax on the entire capital gain triggered by the disposition in the year of sale, even though you would not yet have received the entire sale proceeds.

Note that if you are selling the shares of a QSBC, qualified farm property, or qualified fishing property, you can claim a reserve over a 10-year period.  That might be just the thing to consider if selling to your children or grandchildren.

Buy/Sell Agreement

A Buy/Sell Agreement is a contract between two parties that defines how an owner will sell a particular business interest and how a buyer will buy that interest under certain situations.

A Buy/Sell Agreement may be general in nature to cover unplanned sales (in case of death or incapacity) or it may be very definite in nature tailored to a planned sale to a known buyer (in the case of a planned retirement).

Whether you leave by choice or by chance, a Buy/Sell Agreement ensures your business interest will be transferred at a guaranteed price and on guaranteed terms.

Having the agreement in place improves the odds of the business successfully transferring at a price that can provide adequately for your family and removing uncertainty to employees and partners that depend on the business.

Non-competition agreements

Whether you sell your company’s shares or assets, the buyer will likely want you to sign a non-competition agreement to protect the value of the business.  The payment you receive for signing this (or the implied value associated with this) may be fully taxed as regular income.  However, if requirements, such as filing an election with the CRA, are met, it may be taxed at a lower rate as a capital gain.

Maximizing after tax business proceeds on death

On the last to die of you and your spouse, shares of your incorporated business is deemed disposed at market value resulting in capital gains taxes.  Taxes are payable a second time where company assets are disposed of (creating taxable capital gains) and proceeds distributed to shareholders (which might be in the form of dividends subject to tax).  So, your company investments are subjected to double tax – once at your death and then again when realized and distributed.

If your company has surplus assets, it may be possible to reduce these taxes where the company owns an insurance policy on the life of the shareholder.  Here surplus company assets are used to pay insurance costs which reduces the pool of surplus assets.  What this does is convert surplus assets to a death benefit that can be excluded in valuing the company for tax purposes.  Most or all of this death benefit (above the policy ACB) is credited to the Capital Dividend Account that can then be paid to your heirs as a tax-free capital dividend.

The result is that through insurance you may be able to reduce capital gains taxes at death.  And this reduction in taxes can be greater than a plan to simply redeem company shares at death.  The sooner you plan for this, the cheaper your cost of insurance.

Are there holes in your business exit plans?

Below are some questions to help you begin thinking about your business planning and the status of your business succession.

  1. Have you thought about what will give you a full and meaningful life? Have you priced this out so you know when you can afford to retire?  If your business is worth more than what you need, why are you not planning your exit?  What are the costs to your spouse and family of working hard in the business versus retiring where they get to spend time with you?
  2. Have you thought through the implications to you and your family in the event of a serious illness, disability, or premature death? In such events, have you developed a disaster plan to ensure that you’ll get a good price for your business backed up contractually with a Buy-Sell Agreement or a Shareholder’s Agreement?  Or have you obtained sufficient disability, critical illness and life insurance to financially ensure you and your family’s well-being?
  3. Are you dependent on your business to meet your retirement cash flow needs? Are you growing your investment portfolio so that it will eventually be able to provide you with a satisfactory pension?
  4. Do you know what your business is really worth if it were sold tomorrow? (Have you had an independent person appraise your business so you know what a market offer looks like?)
  5. Do you have enough liquidity to avoid the forced sale of your business on death? Is there enough other assets available to satisfy the tax bill?
  6. Who will be taking over, or will you sell the business? Have you considered the importance of family involvement in leadership and ownership of the company?  If family is involved in leadership, have you thought through how to fairly deal with your family who are active and those that aren’t active in the business?
  7. Is selling your business to a successor (like a capable employee or employees) the best way to maximize the proceeds from selling your business? Do you have a successor in mind for your business?  Is the successor competent, honest and trustworthy?  Is your successor someone who would want to own your business?  Is the successor ready to succeed you – does he / she have the qualifications needed?  Is there an incentive plan for your successor with effective non-compete clauses?  Have you developed a training plan for your successor?  Have you put in place a Buy-Sell or Shareholder’s Agreement with the successor?  Is the agreement secured with resources or funded by insurance to guarantee cash will be available to be paid to you or your family on your planned or unplanned departure?
  8. Are you currently using techniques to reduce or eliminate income tax and estate tax?
  9. Are you planning to utilize the Small Business Capital Gains Exemption as a way to obtain tax-free proceeds on your business exit? Have you structured the ownership of your business so that the company qualifies?  Have you structured the ownership so that you’ll be able to multiply the exemption?
  10. Have you considered alternative corporate structures, stock-transfer techniques, IPPs and RCAs to reduce or defer taxes as part of your exit plan?
  11. Are you doing everything you can do to make your business more valuable to a buyer? Are you making yourself redundant so that it can eventually operate without your showing up to work every day? Have you looked at your staff to determine the effect should on or more persons leave?  Are your staff happy and properly compensated compared to your competitors?  Do you have a backup for each key staff person should someone leave so that your business can continue to operate?

The next step

If you’ve got a saleable business and would like to put together your exit plan, please call our financial planner, Steve Nyvik. Some of the things that Steve can assist you with include:

  • reviewing your current plans and provide some constructive comments;
  • preparing a financial roadmap (otherwise called a retirement projection) so that you can know when you can afford to retire;
  • structuring your investment portfolio to resemble a pension so that it can eventually replace the income provided from your business so that you are financially independent;
  • working together with you and your tax accountants, lawyers and pension benefits consultants to help you implement a tax effective plan backed with a Buy-Sell Agreement or Shareholder’s Agreement;
  • reviewing your insurance program to determine its adequacy to fully fund the buy-out in the event of your serious illness, disability or premature death.

Written by Steve Nyvik, BBA, MBA ,CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

Index and Sector ETFs: Mutual Funds: Speculation X3

How many of you remember the immortal words of P. T. Barnum? On Wall Street, the incubation period for new product scams may be measured in years instead of minutes, but the end result is always a greed-driven rush to financial disaster.

The meltdown spawned index mutual funds, and their dismal failure gave life to “enhanced” index funds, a wide variety of speculative hedge funds, and a rapidly growing assortment of Index ETFs. Deja Vu all over again, with the popular ishare variety of ETF leading the lemmings to the cliffs.

How far will we allow Wall Street to move us away from the basic building blocks of investing? Whatever happened to stocks and bonds? The Investment Gods are appalled.

A market or sector index is a statistical measuring device that tracks prices in securities selected to represent a portion of the overall market. ETF creators:

  • select a sampling of the market that they expect to be representative of the whole,
  • purchase the securities, and then
  • issue the ishares, SPDRS, CUBEs, etc. that speculators then trade on the exchanges just like equities.

Unlike ordinary index funds, ETF shares are not handled directly by the fund. As a result, they can move either up or down from the value of the securities in the fund, which, in turn, may or may not mirror the index they were selected to track. Confused? There’s more — these things are designed for manipulation.

Unlike managed Closed-End Funds (CEFs), ETF shares can be created or redeemed by market specialists, and Institutional Investors can redeem 50,000 share lots (in kind) if there is a gap between the net-asset-value and the market price of the fund.

These activities create artificial demand in an attempt to minimize the gap between NAV and market price. Clearly, arbitrage activities provide profit-making opportunities to the fund sponsors that are not available to the shareholders. Perhaps that is why the fund expenses are so low — and why there are now thousands of the things to choose from.

Two other ETF idiosyncrasies need to be appreciated:

a) performance return statistics for index funds may not include expenses, but it should be obvious that none will ever outperform their market, and

b) index funds may publish P/E numbers that only include the profitable companies in the portfolio.

So, in addition to the normal risks associated with investing, we add: speculating in narrowly focused sectors, guessing on the prospects of unproven small cap companies, experimenting with securities in single countries, rolling the dice on commodities, and hoping for the eventual success of new technologies.

We then call this hodge-podge of speculation a diversified, passively managed, inexpensive approach to Modern Asset Management — based solely on the mathematical hocus pocus of Modern Portfolio Theory (MPT).

Once upon a time, but not so long ago, there were high yield junk bond funds that the financial community insisted were appropriate investments because of their diversification. Does diversified junk become un-junk? Isn’t passive management as much of an oxymoron as variable annuity? Who are they kidding?

But let’s not dwell upon the three or more levels of speculation that are the very foundation of all index and sector funds. Let’s move on to the two basic ideas that led to the development of plain vanilla Mutual Funds in the first place: diversification and professional management.

Mutual Funds were a monumental breakthrough that changed the investment world. Hands-on investing became possible for everyone. Self-directed retirement programs and cheap to administer employee benefit programs became doable.

The investment markets, once the domain of the wealthy, became the savings accounts of choice for the employed masses — because the “separate accounts” were both trusteed and professionally managed. When security self-direction came along, professional management was gone forever. Mutual fund management was delegated to the financially uneducated masses.

ETFs are not the antidote for the mob-managed & dismal long term performance of open end Mutual Funds, where professionals are always forced to sell low and to buy high. ETFs are the vehicles of choice for Wall Street to ram MPT mumbo jumbo down the throats of busy, inexperienced investors… and the regulators who love them because they are cheap.

Mutual fund performance is bad (long term, again) because managers have to do what the mob tells them to do — so Wall Street sells “passive products” with controlled content that they can manipulate more cheaply.

Here’s a thumbnail sketch of how well passive ETFs may have performed from the turn of the century through 2013: the DJIA growth rate was about 0% per year, the S & P 500 was negative; the NASDAQ Composite has just recently regained its 2000 value.

How many positive sectors, technologies, commodities, or capitalization categories could there have been?

Now subtract the fees… hmmmm. Again, how would those ETFs have fared? Hey, when you buy cheap and easy, it’s usually worth it. Now if you want performance, I suggest you try real management, as opposed to Mutual Fund management… but you need to take the time to understand the process.

If you can’t understand or accept the strategy, don’t hire the manager. Mutual Funds and ETFs cannot “beat the market” (not a well thought out investment objective anyway) because both are effectively managed by investor/speculators… not by professionals.

Sure, you might find some temporary smiles in your ETFs, but only if you take your profits will the smiles last. There may be times when it makes sense to use these products to hedge against a specific risk. But stop kidding yourself every time Wall Street comes up with a new short cut to investment success.

There is no reason why all of you can’t either run your own investment portfolio, or instruct someone as to how you want it done. Every guess, every estimate, every hedge, every sector bet, and every shortcut increases portfolio risk.

Products and gimmicks are never the answer. ETFs, a combination of the two, don’t even address the question properly — AND their rising popularity has raised the risk level throughout the Stock Market. How’s that, you ask?

The demand for the individual stocks included in ETFs is raising their prices without having anything to do with company fundamentals.

What’s in your portfolio?

How will ETFs and Mutual Funds fare in the next correction?

Are YOU ready.