2011 Succession Planning Conference

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2011 Succession Planning Conference

At the 4th annual Succession Planning Conference delegates were educated on key aspects of having a plan when buying or selling

February 2, 2012

The Perils of Due Diligence

Eric Walker, partner, WFT Corporate Finance and Valuations Ltd.

This is the life of a mergers and acquisitions consultant and business valuator.

I often help clients sell their brokerage or acquire another. Typically, this will involve preparing a detailed information memorandum highlighting the positive attributes of a vendor’s business or assisting a purchaser in reviewing similar documents to assess the risks of a particular acquisition opportunity. Both services require advice on determining the price. In the end a positive outcome occurs in the form of a purchase or sale transaction.

Unfortunately, problems can occur post transaction that require the services of a business valuator as an expert witness. These problems often result from a lack of, or inadequately performed, due diligence. In most cases, these problems can be avoided.

Due diligence is all about investigating and understanding the operation’s risk as a brokerage: sales and marketing, finance and administration, management and organization, and human resources. It is also about assessing whether the acquisition opportunity matches purchase strategies, which may include profit or revenue growth, increased market breadth, additional management skills, a successor, or a branch office. Based on this assessment, a price is determined.

Subsequently, the investigation switches gears to a process of verifying the cash flow, assets and liabilities of the vendor’s brokerage.

Generally, mistakes or problems occur when key matters are not verified. Usually, the purchaser loses money because they overpaid for business assets that did not exist, or the value of the assets was inflated by the vendor as at the date of close. Then, if a purchaser wants to recoup their losses more money must be spent on lawyers and expert witnesses to litigate.

Some of the documents that should be reviewed are: producer contracts to verify ownership of accounts; payroll records to determine undisclosed vacation pay and the potential for termination costs; and significant client files to assess the risk of retention.

To minimize and avoid significant unwanted and unanticipated costs following an acquisition, it is critical to put a thorough due diligence process in place. Follow a detailed checklist and review all aspects of a brokerage’s operation—administration, sales, management and personnel. Hire a second pair of eyes and take the emotion out of the process by using professional advisors.

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Succeeding at Succession: Providing Insights and Solutions for Today’s Private Businesses

Armando Minicucci, principal, Tax Services Group, Grant Thornton LLP.

Grant Thornton LLP, in partnership with Canadian Financial Executives Research Foundation (CFERF)—the research arm of FEI Canada—released a new survey-based report, Private Company Succession Planning: Where Do You Stand? A few of the key findings have shown that while owners may have a clear vision for the business, many are unsure of: their exit date; the particulars of the plan for their exit; and the potential consequences of the transfer of ownership on management and other employees.

While we’re accountants who focus on tax minimization strategies and valuations, there’s been an increased focus on understanding the softer side of succession. The financial pieces of the succession puzzle remain critical, and so are the relationship pieces. At the end of the day, a business owner only gets one chance to transition their business.

What’s most important is to have a clear vision and determine the desired objectives and outcomes. At that point, the tax, estate and financial plan can be structured to meet those set out goals.

At the very least, business owners should take the time to define where they would like to take the business, what personal goals they hold and how to reconcile their own objectives with those of their key stakeholders.

Family businesses face particular challenges of their own. If family members perceive the business as a family heirloom to be preserved for future generations, they may object to an owner’s goal of bringing in professional management, attracting external investors or retaining capital by reducing shareholder distributions.

Despite the challenges in setting succession planning goals, it is critical for privately held business owners to engage in this process if they hope to avoid conflicts that can result in deteriorating business value. It’s important to lay some initial groundwork related to goals and objectives—from there the process is not linear and aspects of the approach can be planned concurrently.

Obstacles to creating a succession plan may change over time, they will never go away. The best course of action is to get started—our research shows those that do have a plan in place have many of the elements necessary to make it a successful plan. It took time to build the business, it takes time to pass it on.

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Broker Panel

Joyce Usher-Mesiano, president, National Brokers Insurance Services Inc.; David Browne, president, Martin Merry & Reid Ltd. Insurance Brokers; Chris Steer, co-chair, Chris Steer Insurance Brokers and Consultants.

Each panelist in the last session of the day has had a different experience in succession planning.

Joyce Usher-Mesiano, president, National Brokers Insurance Services Inc., is one of three partners. In December 2008, one of the partners (who is also Usher-Mesiano’s sister) was diagnosed with terminal cancer. This took Usher-Mesiano and her sister out of the business for some time. Luckily, her sister battled the disease and now the business is back on track and in acquisition-mode, with two potential deals in the works. Having a succession plan, dependable employees and a third partner to take the reigns at the time is what kept her business growing, explained Usher-Mesiano.

David Browne, president, Martin Merry & Reid Ltd. Insurance Brokers, took over his father’s company 25 years ago. He has since acquired seven firms. He said he’s learned that whether you’re in buy or sell mode, you should be game ready at all times and establish your standards against industry benchmarks.

Chris Steer, co-chair, Chris Steer Insurance Brokers and Consultants, sold his book of business to colleague, Marc Puddy, in June 2011. At 79 years old, Steer said it was time for him to settle his estate and ensure he was able to provide for his wife and two sons.

Though they come from very different backgrounds and experiences, each broker owner confirmed they couldn’t have bought or sold without using a professional consultant.

Usher-Mesiano said using a consultant helped open doors for potential deals.

“We tried to do it on our own and it just seemed that every time I called an office there had already been other brokerages who had asked [if they were selling] before me,” she said.

From a seller’s point of view, Steer says his consultant took care of all the financials, provided advice, and held his hand throughout the entire transaction. He implied that just as insurance customers need a broker, business owners need consultants.

Meanwhile, Browne recounted a negative experience using a “business broker” who wasn’t capable of doing a soft analysis on a brokerage that Browne was interested in purchasing. Browne employed his own team to do their due diligence on the potential deal and they found the accountant was stealing from the company.

He noted that luckily, the environment for consultants has changed and many companies, such as Cookson Walker and PwC, are creating a professional standard.

Also, in discussing acquisitions, Browne said one of the biggest challenges today with family-owned businesses is divorce.

“Many candidates inside the firms are going through marriage breakdowns and they get wiped out with their equity and you need equity to play the game,” he said. “So many people burn through their investment capital and I feel sorry for them, but then again you can’t just give it away.”

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