Taxes and business valuation Flashcards
types of tax
- Income Tax
> Corporate and personal - Sales Tax
- Property Tax
- Payroll, CPP, etc.
Income Tax
- what type of system
- whats included
- Progressive Tax System
> Marginal tax rate increases as you earn more
<><>
What’s Included - Employment income
- Interest
- Capital gains
- Dividends
tax deductions in ontario
federal tax
provincial tax
CPP/EI
tax avoidance vs tax evasion
- Tax Avoidance
> Legal and advisable
<><> - Tax Evasion
> Illegal and inadvisable
how to effectively reduce taxes
Use All Deductions
* RRSP contributions
* Charitable donations
* Medical expenses
* Union/license dues (CVO)*
* Childcare expenses
* Capital losses
<><>
Defer Taxes and Change Income
* Professional corporation
* Use TFSA and RRSP
* Earn dividends
<><>
* Tuition Credits
source deductions for taxes - who are they for, how do they work?
- Employees
- Taxes taken off your paycheck
deadline to pay taxes
- April 30th (April 15th in USA)
- June 15th for self-employed to file
- Quarterly remittances
paying your taxes as an employee - considerations
- Simple tax situation, few complications
- Considering filing yourself
- Simpletax, Turbotax, etc.
paying your taxes as an employer / self employed / professional corp
- considerations
- Enlist an expert
- Accountant to help manage deductions, remittances, etc.
why to consult an expert for taxes?
- Tax mistakes are expensive
- Fees and penalties are high
- Significant benefits from prudent tax planning
how can an accountant be helpful with taxes?
- Helps you file your taxes
- Provides advice on minimizing tax due
- Answer personalized questions
Why Practice
Valuation is
Important
- Avoid overpaying
> Cashflow difficulties - Worth of a significant asset
> Retirement planning - When and what to sell for
> Price > or < value - Understand investment valuations
> Whether practice owner or not
Three Main
Methods of practice valuation
- Income (Capitalized Cash Flow) Approach
> Main approach - Market Approach
> Comparable recent sales - Cost (Asset Based) Approach > Equipment value
steps of capitalized cash flow method for practice valuation
- Find normalized maintainable cash flow
> Adjust for discretionary or non-recurrent items - Assess risk of cash flow
> Weighted Average Cost of Capital (WACC) - Add any redundant assets
> Excess cash, investments, etc.
<><>
1. Normalize annual income
and expenses - normalized EBITDA
> net income before taxes; deduct:
> depreciation
> interest on long term debt
> donations
> home office renovation
> family wages
- Find Range of Maintainable
EBITDA
> after practice owner and family salaries - Incorporate Taxes and CAPEX – Find Maintainable Cash Flow
- Assess Risk of Cash Flow – Weighted Average Cost of Capital (WACC)
> look at cost of debt
> cost of equity
> debt to capital
> equity to capital
- account for inflation, estimate real growth rate, capitalization rate - Apply Multiple, Add Redundant Assets, Subtract Debt
rules of thumb for practice vlaue - how much will you be able to borrow? how much will they pay?
- Traditionally limited by bank lending
> 4x to 5x maintainable cash flow - Banks willing to lend a bit more now
> 6x to 8x maintainable cash flow - Corporate consolidators pay more
> 8x to 11x maintainable cash flow
main points of practice valuation
> what to take into account to find value? (w/ example)
- Practice Revenue
> $1.6M to $1.9M - Maintainable Cash Flow
> Adjust for discretionary and non-recurrent items
> $158,000 to $181,000 - Multiply Cash Flow
> Risk determines the multiple > 5.6x to 7.8x - Find Value
> $1M to $1.3M
How Do Big
Corporations
Pay More for practices?
- Corporate Synergies
> Higher Cash Flows, More
Value
How to Pay
for a Practice
Use Cash Flow to Pay Down Debt
<><>
* Maintainable Cash Flow
> ~$170,000 per year
> After paying practice owner $130,000 to $160,000
- Practice Purchase Price
> $1,150,000
> Financed by debt (bank loan) - Repay over 8 years
> $170,000 per year towards debt - After Debt Repaid
> Cash flow can go to owner or be used for growth, expansion, etc. - Own an Asset
> Worth $1,150,000
