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Tax Incentives, Government Programs, and more

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David W. Regan Partner-in-Charge Tax Incentives Practice KPMG LLP Some Preparation Tips for a Successful Sale or Financing (continued) ... – PowerPoint PPT presentation

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Title: Tax Incentives, Government Programs, and more


1

Money Talk - VCs and then some An exploration of
grants, incentives and other means to survive
the financial Death Valley.
2
A G E N D A
  • Introductions
  • Financing Options
  • Tax Incentives, Government programs, and more

3
Financing OptionsChris Van StaverenPartner,
Transaction ServicesKPMG LLP
4
Entrepreneurial Companies - Stages of Growth
Start Up
Early Stage
Growth
Maturity
  • Full service company
  • Complexity increases
  • Multiple locations
  • Management, Executive, and Board formed
  • Reporting requirements increase
  • Focus on profitability
  • Owner-managed
  • Product concept working prototype
  • One location
  • Use of contractors
  • Trial customer
  • Product focused
  • Owner-managed
  • In production mode with one or two products
  • One or two locations
  • Few, but increasing, employees
  • Informal processes becoming a challenge
  • Revenue stream uncertainty
  • Angels tapped out
  • Need resources to executegrowth strategy
  • North American focus
  • Different sources of revenue
  • Multiple products/ services
  • Multiple locations
  • Formalization of management structure
  • Resource constrained
  • Global focus
  • Focus on customer growth

Lever angels, friends and family, government and
tax programs
Obtain external funding venture capital
Access other forms of financing (Debt/Private
Equity)
Decisions to exit, go public, or stay-the-course
Management of Tax Exposures
5
Whats Going On Out There?
  • Significant changes to the venture capital
    landscape
  • Fewer Canadian players but some new faces
  • US VC funds are looking at selective Cdn
    Investments
  • Generally more focused investment criteria
  • Less equity required to fund start-ups
  • Difficult to obtain debt for small enterprises
  • Have to pay more attention to burn and working
    capital needs

6
What Does a Venture Investor Look For?
  • Strong entrepreneur supported by capable
    management team
  • Develop/own/control intellectual property
  • Leadership position (or potential) in a large
    market segment
  • IRR targets 10x potential return on investment

7
Living With a VC / Impact on Your Business
  • Loss of autonomy Board oversight
  • Increased operational and financial reporting
  • Accountability Round 2 financing
  • Increased costs audits, legal
  • Opens doors to opportunities (customers, people,
    strategic relationships)
  • Forces some structure and process into business
  • Drives specific goal setting and focus

8
What Does A Private Equity Investor Look For?
  • Leadership position (or potential) in a defined
    and understandable market segment
  • Diversified customer base
  • Range of products
  • Develop/own/control intellectual property
  • Solid track record and clear growth plans
  • Strong leader supported by capable management
    team
  • Investor/management alignment
  • IRR targets generally 3 to 7 year investment
    horizon

9
Debt Financing a Broad Menu of Choices
  • Canadian lending market includes
  • Venture debt
  • Canadian chartered banks
  • Asset-based lenders
  • Term lenders
  • Equipment finance and leasing companies
  • Second-lien lenders
  • Mezzanine/subordinated debt lenders
  • Leverage ratios contracted dramatically in 2009
    now creeping up
  • Low interest rates have increased affordability
    flat yield curve encourages longer term borrowing
  • Feature flexibility includes
  • bullet payments
  • deferred interest notes
  • fewer covenants

10
Why Do Financings Fail?
  • Inadequate preparation
  • Lack of clarity
  • KISS
  • Unrealistic financing concept
  • Management shortcomings / misalignment
  • Lender/investor due diligence findings
  • Market competition
  • Surprises
  • You never get a second chance to make a first
    impression

11
How Do I Know When Its Time To Sell?
  • Take this simple test
  • How do I look in the mirror?
  • Do I have a clear succession candidate and plan?
  • Do I have good story to tell right now?
  • How does the future look?
  • How often is the phone ringing?
  • Do I have too many eggs in one basket?
  • Regardless of how you did on the test, the Boy
    Scouts mottoBe Prepared is a good one
  • Its always better to bargain from a position of
    strength
  • understand what your business is worth
  • make sure it will show well to potential buyers
  • anticipate potential problems or concerns and
    address in advance

12
What Are My Options To Realize Value?
  • Todays markets offer a dizzying array of
    alternatives, including
  • management buy-outs
  • management buy-ins
  • private equity
  • leveraged recapitalizations
  • mezzanine financing
  • IPO
  • trade sale
  • Making the right choice depends on owners
    objectives, including non-financial
    considerations
  • Outright sale vs. taking some chips off the table

13
Some Preparation Tips for a Successful Sale or
Financing
  • Look at your business from the investors point
    of view
  • Thats the perspective that matters
  • As much as possible, do the investors work for
    them
  • Anticipate concerns (especially deal-breakers)
    and address them in a reasoned fashion
  • Competitive tension (real or perceived) generally
    creates negotiating leverage and yields the best
    possible offer
  • Listen carefully throughout the process,
    including non-financial issues
  • Look for low or no-cost gives to offer to
    potential investors
  • Quality and commitment of post-transaction
    leadership is invariably a key concern
  • Anticipate the issue and address it in advance
  • Be prepared to offer a reasonable transitional
    arrangement if you are seller

14
Tax Incentives, Government Programs, and
moreDavid W. ReganPartner-in-ChargeTax
Incentives PracticeKPMG LLP
15
Some Preparation Tips for a Successful Sale or
Financing (continued)
  • Markets
  • Review current position in the business units in
    which you operate and in the markets that you
    serve.
  • Consider future trends.
  • Decide which markets you want to operate in going
    forward.
  • Management Team
  • Strength
  • Ability to deliver shareholder value.
  • Financial Plans
  • Refine, taking into account strategy and the
    effect of capital raise.
  • Describe how funds raised will be used
  • Be realistic, consider expectations of potential
    investors.

16
Do You Need External Advisors?
  • Financial Advisors
  • Provide strategic direction and assist in
    financing and negotiations during process
  • Coordinate the presentation of any forecasts and
    related disclosures
  • Develop a model to assist in identifying the
    valuation parameters of the company, the funds to
    be raised, the equity stake to be sold by the
    company, the number of shares to be issued

17
Government Incentives
  • Are you maximizing your entitlements?
  • Whats available, Who qualifies, and How much?
  • Scientific Research Experimental Development
    (SRED)
  • Federal Industrial Research Assistance Program
    (IRAP)
  • Ontario Co-operative Education Tax Credit (OECT)
  • Ontario Apprenticeship Training Tax Credit (ATTC)
  • Ontario Interactive Digital Media Credits
    (OIDMTC)
  • Various Other Industry Specific Tax Credits

18
Scientific Research and Experimental
Development(SRED)
  • Defined criteria (per Income Tax Act)
  • Scientific research such as lab-based activity
  • Experimental development process or product
    improvements
  • Benefits delivered through Tax system
  • Technical report and costing summary due 18
    months after year end
  • Qualifying CCPCs entitled to refundable 35
    Federal credit and 10 Ontario credit
  • Non-refundable credit at 20 with 20 year
    carry-forward
  • Discretionary SRED expenditure pool balance
  • Over 3 billion distributed by Federal government
    annually with over 20,000 claimants nationally
    per year

19
Maximizing SRED Opportunities
  • Criteria to be met
  • Uncertainty or problem
  • Advancement or solution
  • Content or approach
  • Qualifying costs include
  • Direct labour
  • Materials consumed/ transformed
  • Contract payments
  • New SRED capital
  • Leased equipment
  • Overheads (via proxy or traditional)

20
Maximizing SRED Opportunities
  • Potential opportunities involving SRED
  • Is time being spent developing new ways of doing
    things?
  • Is time being spent adapting processes before
    saleable products go out?
  • Are there projects that failed for technical
    reasons?
  • Are software or technical consultants involved?
  • Is money invested to develop better products or
    faster processes?
  • Are internal process improvements being
    attempted?
  • Is shop floor experimentation being performed?
  • Are there patents involved?

21
Federal Industrial Research Assistance Program
(IRAP)
  • Criteria
  • National Research and Technology Development
    Activities
  • Partnership programs (use of Industrial
    Technology Advisors (ITA))
  • Adoption / adaptation / creation of new
    technology and innovation
  • Upfront request approval by NRC
  • Who qualifies?
  • Small and medium-sized Canadian incorporated
    companies
  • Less than 500 employees
  • Benefits
  • Maximum of 500k with majority in 50k to 100k
    range
  • Repayable, non-repayable and cost sharing
    arrangements
  • http//irap-pari.nrc-cnrc.gc.ca/main_e.html

22
Ontario Co-operative Education Tax Credit (OETC)
  • Criteria
  • Employed students enrolled in a recognized
    post-secondary co-operative education program
    (extensive listing)
  • Who Qualifies?
  • All taxpayer businesses with Ontario permanent
    establishment
  • Benefits
  • Refundable tax credit based on total preceding
    year payroll
  • 15, if less than 400k
  • 10, if more than 600k
  • Total of credits per work placement term, lessor
    of
  • Rate times of pay for term
  • 1,000
  • http//www.rev.gov.on.ca/english/credit/cetc
    (Bulletin 3021)

23
Ontario Apprenticeship Training Tax Credit (ATTC)
  • Criteria
  • Apprenticeship contract registered by the
    Ministry of Training, Colleges and Universities
  • Must be a qualified skilled trade
  • Who Qualifies?
  • Eligible employer tax paying corporations with
    Ontario PE
  • Eligible expenditure salaries / wages and
    taxable benefits (per T4)
  • Benefits
  • 25 of eligible expenditure to a max of 5,000
    per year
  • 30 credit available, if previous year payroll of
    400k or less
  • http//www.rev.gov.on.ca/english/bulletins/ct/302
    0.html

24
Ontario Interactive Digital Media Tax Credit
(OIDMTC)
  • Refundable tax credit based on eligible Ontario
    labour expenditures and eligible marketing and
    distribution expenses with respect to interactive
    digital media products
  • The OIDMTC is calculated as 40 of eligible
    Ontario labour expenditures and eligible
    marketing and distribution expenses incurred
    after March 26, 2009 by a qualifying corporation
    to create eligible interactive digital media
    products in Ontario
  • There is no limit on the amount of eligible
    Ontario labour expenditures which may qualify and
    there are no per project or annual corporate
    limits on the amount of the OIDMTC which may be
    claimed. Eligible marketing and distribution
    expenses are capped at 100,000 per eligible
    product
  • -Eligible Products
  • To be eligible for the OIDMTC a product must be
    an interactive digital media product whose
    primary purpose is to educate, inform, or
    entertain, and that achieves its primary purpose
    by presenting information in at least two of
    (i)text,(ii)sound and (iii) images.
  • Types of interactive digital media products that
    may be eligible for the tax credit include but
    are not restricted to websites, games,
    educational and informational products
  • All or substantially all of the product was
    developed in Ontario by the qualifying
    corporation

Numerous other provinces have similar programs
(BC, Quebec, Maritimes)
25
Other Industry Specific Tax Credits for Companies
  • Ontario Computer Animation and Special Effects
    Tax Credit
  • Ontario Sound Recording Tax Credit
  • Ontario Educational Technology Tax Credit
  • B.C. Film Incentive Tax Credit
  • B.C. Digital Animation or Visual Effects
    Incentive
  • Quebec Tax Credit for the Cetnre National des
    Nouvelles Technologies
  • Quebec Refundable Tax Credit for Technology
    Adaptation Services
  • . . . And many, many more

26
List of Government Incentives
  • Financing Incentives
  • Applied Research and Commercialization Initiative
  • BDC Financing for Innovation
  • Canada Media Fund (CMF)
  • Canada New Media Fund
  • Canada Small Business Financing Program (CSBF)
  • Champions of Innovation
  • Collaborative Research
  • Community Futures (CF) Program
  • Community Ventures Capital Fund (CVCF)
  • Defense Industrial Research Program (DIR)
  • Eastern Ontario Development Fund (EODF)
  • Eastern Ontario Development Program (EODP)
  • EDCs Export Guarantee Program in Support of
    SRED
  • EDC Equity Direct and Indirect Investment
  • EDC Export Express Credit
  • EDC Export Guarantee Program
  • EDC Project Finance
  • Global Commerce Support Program - Going Global
    Innovation

Intellectual Property Development Fund (Pilot
Project) Interact International Strategic
Opportunities Program (ISOP) Investment
Accelerator Fund (IAF) Labour Market Partnerships
Mathematics of Information Technology and
Complex Systems (MITACS) Market Readiness
Martin Walmsley Fellowship for Technological
Entrepreneurship Mass Media Initiative Northern
Ontario Youth Internship and Co-op Program OMDC
Export Fund OMDC Interactive Digital Media Fund
(IDM) Ontario Research Fund Research Excellence
(ORF-RE) Ontario Research Fund Research
Infrastructure Program (ORF-RI) Ontario Targeted
Wage Subsidy Ontario Venture Capital Fund (OVCF)
Proof of Concept Rural Economic Development
(RED) Program Smart II Program Strategic
Aerospace and Defense Initiative (SADI) Strategic
Jobs and Investment Fund (SJIF) Strategic Project
Grants (SPG) Southern Ontario Development Program
(SODP) Summer Jobs Service Sustainable
Development Technology Canada Technology
Development Program (TDP) Tandem Expansion Fund
27
List of Government Incentives - Continued
  • Tax Incentives
  • Apprenticeship Job Creation Tax Credit (AJCTC)
  • Ontario Apprenticeship Training Tax Credit (ATTC)
  • Ontario Capital Tax Elimination for Manufacturing
    and Resources Activities
  • Ontario Business Research Institute Tax Credit
    (OBRITC)
  • Ontario Computer Animation and Special Effects
    Tax Credit (OCASE)
  • Ontario Co-operative Education Tax Credit (CETC)
  • Ontario Current Cost Adjustment (OCCA)
  • Ontario Employer Health Tax Exemption
  • Ontario Innovation Tax Credit (OITC)
  • Ontario Interactive Digital Media Tax Credit
    (OIDMTC)
  • Ontario New Technology Tax Incentive
  • Ontario Research Stock Option Credit (ORESO)
  • Ontario Retail Tax Exemption on RD and
    Manufacturing Equipment
  • Ontario Tax Exemption for Commercialization
    (OTEC)
  • Scientific Research and Experimental Development
    (SRED) Tax Credit
  • Ontario Sound Recording Tax Credit
  • Ontario Research and Development Expenditure
    Deduction
  • Computer Capital cost Allowance

28
Presenters Contact Details
Chris Van Staveren Partner Transaction
Services 416-777-3005 cvanstaveren_at_kpmg.ca
David Regan Partner-in-Charge RD Tax Incentives
Practice 416-549-7809 dregan_at_kpmg.ca
The information contained herein is of a general
nature and is not intended to address the
circumstances of any particular individual or
entity. Although we endeavor to provide accurate
and timely information, there can be no guarantee
that such information is accurate as of the date
it is received or that it will continue to be
accurate in the future. No one should act on such
information without appropriate professional
advice after a thorough examination of the
particular situation.
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