Atlanteknology - Technology News for Atlantic Canada

Internet Resource for buying/selling businesses

I received an email the other day from Acquisition.biz. I do not endorse it and have no affiliation with it. However, I have taken a look at the site and it seems like a useful tool for those who might be interested in buying or selling a business and want to reach a wide audience.

Take a look. let me know what you think.

Venture Capital - KNow what you are getting into

I just read a short article in the 22 January 2007 issue of Businessweek magazine (yes, my reading list is getting long) and it reminded me of a conversation I had with the CEO of ITANS last Thursday night. We were chatting about the difficulties start-ups have in raising capital and the disconnect there is when venture capital gets involved.

As Mike noted, the owner has typically invested years in the creation of her company and the company is often like a family member, or cherished prize. The owner wishes to keep control and wants the ability to continue to direct and chart the company’s path well into the future.

This contrasts with what many in venture capital want – which is a defined strategy to maximize value over a relatively short time frame – often 5 years. Venture capital often does not want the original owner to remain as the primary strategic visionary – more often that not the reality is the original owner is not all that good a business person.

So venture capital wants the original owner to remain but in a secondary capacity as chief technology officer of some such position. Imagine the frustration and disappointment when the original owner has to play second fiddle to an outsider.

The article on Businessweek talked about corporate churn – the rate at which high level executives leave companies. The statistics are interesting. The churn rate increased by 68% from 2005 to 2006. That is to say, 68% more senior executives left their companies in 2006 than they did in 2005.

This can be explained in a number of ways but at the end of the day it often means a significant percentage of people have left their companies at least slightly disillusioned or worse.

One way we can help to alleviate this is to provide more information to the business owners who run growing companies. Now I know that we are all labouring under the deluge of information coming at us via the internet and other media and I have no easy answer other than to say we should work to provide more short straight forward seminars to business owners to give them the tools to manage their company’s growth.

Patents predicting prosperity?

I understand the reluctance of investors, bankers, and others when they squirm and shuffle their feet at the notion of valuing intellectual property. However, the reality is that that intellectual property is valuable. Perform a search using the Google search engine and you will find out that the value of the Coke brand is estimated to be 67 billion USD. Yes, that is correct, 67 billion. Disney clocks in at 21 billion. The CEO of Coke once said that all of the company’s physical assets could be destroyed and that this would not present a problem as long as the brand survived. (Taken from the Canadian Intellectual Property Office’s website).

All of which is to hammer home the point that intellectual property is becoming more important than “bricks and mortar” ie. buildings, equipment and the like.

Need more proof? Today I read an article in the January 8, 2007 issue of BusinessWeek called “Follow the Patents”. The article discusses the notion of valuing a company’s prospects based in part on its patent portfolio and the number of times the patent portfolio is mentioned by other patents.

A company called “1790 Analytics” generated a list for BusinessWeek in 2005 of its top 15 prospects based on the “Pipeline Quality Measure” and, a year later, 11 of the picks were up substantially. This year, companies such as Polaris are among the top choices – I am not sure on that one in part because the market for consumer discretionary goods is probably not going to be all that robust, But then again, I am not an investment analyst.

The point however is clear (at least to me) - intellectual property is valuable.

If you are a business, learn to protect it and leverage it. You could lose it if you do not. If you are a banker, learn how to value it and take security in it. We will all be better for it.

London's Alternative Investment Market - Part II

I recently made a post discussing the London Alternative Investment Market (AIM) and the increased interest in using AIM.

Well, in the most recent issue (July/August 2006) of Lexpert magazine (a Canadian magazine for lawyers) there is a nice article on the AIM and I will note a few of the statistic they use.

- total market cap is 75 billion (a fivefold increase of the last 5 years)

- 20 billion was raised in 2005

- in Q1 2006 6.5 billion was invested

- 519 companies did IPO’s in 2005

Also noted is that the regulatory regime for AIM, while vigorous, is more streamlined than one would find in North America, especially when one considers Sarbanes-Oxley and the SEC.

Something to chew on if you are considering an IPO as a means of expansion…

The Alternative Investment Market?

In the most recent issue of Backbone Magazine there is an article concerning the Alternative Investment Market (AIM).  I must confess that I have not heard of it (before now) but it seems that at least some start up Canadian companies have. 

What is it?

The AIM is, for lack of a better description, the European equivalent of the NASDAQ.  It is a mechanism by which technology companies can access capital in the European market.

As recently as the first quarter of 2006 two private Canadian software companies (Excapsa Software Inc. and Sandvine Corporation) went public by listing their common shares in London on the AIM.  Neither of them have sought a stock listing in Canada.  Both of their IPO’s were vastly oversubscribed. 

There are some tax complications, which arise as a result of listing on the AIM, which can be resolved in a variety of ways the most common of which is to have the company become a mutual fund corporation (MFC).  The requirements for becoming a mutual fund corporation include:

1.    that the company must be a holding company - some sort of reorganization may be required,
2.    95% of the company's shares (by value) must be redeemable by shareholders on demand,
3.    it will be necessary to ensure that more than 50% of the MFC’s shares are held by Canadian residents at all times. 

This may sound daunting and unattractive but, for European investors, the MFC structure is not a hard sell according to Robert Brant of Lexpert Magazine.

If you are in the position to do so, it may be worthwhile to take a look at listing on the AIM as opposed to some of the more traditional stock exchanges (the TSX, the NYSE, the TSXV or the NASDAQ).

Also of importance in any decision as to what exchange to list on is the Sarbanes-Oxley Act in the USA. Ponder this statistic - of the top 25 global IPO's in 2005, only 1 took place in the USA (Businessweek magazine - May 22, 2006). In 2000, 9 of the top 10 took place in the USA.

SR&ED Tax credits - Not so scary

I attended an information seminar on Scientific Research and Experimental Development (SR&ED) Tax Credits put on by PricewaterhouseCoopers last week. I wanted to expand on my earlier post on the topic. 

Specifically, I wanted to expand on eligible costs, eligible projects, and the filing process.

Eligible Costs

The following costs can be reimbursed: wages, subcontractor payments, materials consumed or transformed, overhead, third-party payments (for example, payments to industry associations for services rendered), as well as capital assets (owned or leased) used in the process. The list is broader than I had originally thought and, I suspect, broader than many readers may have imagined. 

Eligible Projects

The basic test to determine whether your project qualifies for the tax credit is whether the project has some technological uncertainties, whether there are technological advancements, and if the project is done in a systematic manner by experienced personnel.

If you are a producer or manufacturer and are experimenting with new materials to lower costs, analyzing more durable materials, or changing the structure of a product to make it better, you may be eligible for the tax credit.

If you are looking at ways to design new equipment to manufacture items more quickly and/or with higher quality, or trying to revise your processes to consume less energy/pollution, you may be eligible for the tax credit.

If you have designed new or improved software for some particular application you may be eligible for the credit.

When you see the word “technological” do NOT assume that you need to be in a high tech industry or biotech or anything of the sort to qualify. If you own a body shop and created a new way to weld exhausts, and this was a systematic process – you may qualify.

Procedures

The application for the tax credit is filed with the entity’s tax return. Once filed it will eventually be reviewed by the Halifax Tax Office, which is the centre for Atlantic Canada in terms of the tax credit. Expect an audit if it is your first claim or if the claim is large.

There are a variety of forms which must be filled out and information which must be provided and I will leave this to someone considerably more experienced than myself to describe. Having said that, the filing requirements do not appear to be too onerous especially if you have experienced help assisting you.

Conclusion

As I said before, I suspect that there are numerous entities out there which could probably claim SR&ED tax credits but do not  - principally because they do not think their projects would qualify and/or they believe the process is too complex or cumbersome. I urge you to reconsider and seek some professional advice. You may be missing out on an excellent opportunity to save some money.

(Thanks to Chris Sullivan of the Halifax PricewaterhouseCoopers' office for the presentation.)

Capital Pool Companies

The TSX Venture Exchange has a programme (implemented in Nova Scotia in March 2005) called the Capital Pool Company Programme  which will be of interest to entrepreneurs, angel investors and businesses, who have considerable business experience. The initial public offering for a capital pool company will generally raise between 200,000 and 1.9 million dollars.

Capital pool companies  were the most popular method for joining the TSXV in 2004, with 87 being launched.

In a nutshell, the Capital Pool Company Programme is designed as a corporate finance vehicle to provide businesses with an opportunity to obtain financing earlier in their development than might otherwise be possible through a normal IPO. The programme permits an IPO to be conducted and a TSXV listing to be achieved by a newly created capital pool company which has no assets other than cash and which has not commenced commercial operations. The capital pool company uses the pool of funds obtained through the IPO to identify and evaluate assets or businesses which, when acquired, qualify the capital pool company for listing as a regular tier 1 or tier 2 issuer on the TSXV.

There is considerable information on the web about the programme. I just thought I would make mention of it.