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.

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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

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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)

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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?

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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)

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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

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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)
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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

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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
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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

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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
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