This article is taken from our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens North America. These articles are part of our mission to become the partner of choice for your success by keeping you up to date.
Drawing up a RADS is new for both employers and employees. Some business owners already have a clearly defined idea of what their SERP should be, and have even shared it with their employees, while others are less advanced in the process of developing such a plan.
It is essential that the business valuator involved in the RADS process determines where his client stands, as this will have an impact on the terms of the contract and the contribution he will be required to make.
Regardless of where your customer is in the RADS process, the following basic principles must be observed at every stage of the assessment process:
- Transparency – by carrying out an independent assessment.
- Communication – keeping employees regularly informed about the progress of the assessment process.
- Setting and managing expectations – communicating any changes to the proposed participation %, conditions, price, etc. without delay.
Calling in a company appraiser – “when” and “why
When should you call in a business valuator? – It’s never too early…
The first planning questions the owner should ask himself:
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- Purification of the business (for tax purposes) if the owner sells his shares.
- Is a share freeze required if the value of the shares proves too high (shares too expensive for employees to buy)?
- Business restructuring – removal of assets not related to business operations.
- Adequacy of share capital structure – what happens if the issued share capital is only one share?
- Early indicators of value can help determine how employees will buy shares:
– Buying from the owner: can employees afford to buy shares?
– Buying cash: is it necessary to freeze shares before implementing the plan?
- An opportunity for the owner to verify the value of his business.
The first planning questions the employee should ask himself :
- The sooner the process of establishing value begins, the sooner employees will be able to determine :
If they can afford to buy shares; and
if they want to buy them.
- This process can also help define how shares can be purchased:
– cash purchase: using the employee’s savings, RSP or TFSA;
– by granting shares instead of bonuses;
– through withholding taxes;
– through financing or guarantees offered to employees by the company.
Why should you hire an independent business valuator?
Obtaining a FAIR initial assessment is essential, because :
- it establishes the initial purchase price for employees;
- it sets a benchmark for measuring the company’s future growth and increase in share value.
- Owners are often reluctant to accept an independent appraisal, or question its necessity because of the costs involved.
So why is this assessment so important?
She IS independent:
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- it eliminates the owner’s bias as to the company’s value;
- it ensures transparency for employees – the figures presented are not those of the owner;
- the company appraiser will be able to provide objective data and an independent analysis to both employer and employee, without being in a conflict of interest;
- it lends credibility to the establishment of value, which is important in the eyes of third-party lenders and employees as potential investors.
An independent appraisal establishes a credible basis for future appraisals, as well as a formula or methodology for the future.
Appraiser hiring process
Who hires and pays the appraiser? Regardless of who hires and pays the appraiser, the concept of independence must be clearly communicated.
What level of detail is required? A high level of insurance may be more important for the employee than for the employer.
The two most common types of report :
- Value calculation – this calculation essentially uses the owner’s figures, with little or no confirmation.
- Estimated value – this is an independent assessment of the company and the economy with a higher level of confirmation.
Other valuation considerations :
- Valuation date – the valuation must be up to date;
- What is valued – 100% of shares (in blocks) of a specific percentage;
- Valuation basis – fair market value, fair value, net book value?
In conclusion, the more the business valuator is involved in the valuation process, which will ultimately be informed by the circumstances of each situation, the sooner the process is likely to be transparent and the outcome positive.
With contributions fromAndrew Dey of Mowbrey Gil. This text was written as part of our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens, North America.
