Letters

FACT OR OPINION?

In "Selling out," by Robert Napoli (Personal financial planning, May), it states that "most private Canadian businesses will sell for a price based on a multiple of three to five times EBITDA." This is presented as a factual statement with no consideration of alternate methods of determining value. Given your affiliation with the Canadian Institute of Chartered Business Valuators and the wide reach of your publication I would have expected more thoroughness in considering what is published.

With all due respect to the professional quoted in the article, anyone with experience in performing business valuations for commercial transactions will tell you that, whilst the use of earnings multiples may be an appropriate methodology, to imply that a formula-driven approach is generally applied in valuing private companies is dubious at best. As a valuations professional it is frustrating to see these opinions, published as factual statements since it could lead to incorrect investment decisions being made. Any potential buyer or seller of a business should consider the intrinsic value of the business incorporating their own circumstances prior to making such a decision.

Dave Pearson, CA

Sydney, Australia

Napoli's reply:

Mr. Pearson makes a valid point: there are a range of approaches that can be used to value a private going concern, the most common of which are the capitalization of earnings (commonly referred to as the multiples approach) and the discounted cash flow method. Vendors can of course consult a CBV for assistance in valuing their business. However, in dealing with dozens of private businesses in Canada with earnings of less than $500,000 and that are facing succession, the most commonly accepted and understood approach is to look at comparable transactions on a multiples basis. If the business produces consistent cash flows, such an approach is sensible, can be externally and objectively validated and is perhaps the most cost effective. If, on the other hand, the business has or is expected to experience unusual growth patterns, is in a turnaround situation or has an unusual pattern of cash flows, another approach or combination of approaches may be warranted. The article specifically referred to private small businesses in Canada with consistent cash flows and in this regard the statement is valid.

TIMING IS OF THE ESSENCE

I have just received the June/July issue of CAmagazine with its cover story on the imminent demise of GAAP ("Going global"), the "sooner the better," one phrase in the article says.

It is interesting that enclosed with the magazine was a flyer advertising an expensive three-part course offered by the CICA entitled "In Depth GAAP Course."

D.M. MacPherson

City withheld

Letters should be sent to:

The Editor, CAmagazine,

277 Wellington St. W., Toronto, Ont.

M5V 3H2 (letters.editor@cica.ca).

CAmagazine reserves the right to edit or shorten them for clarity