Building a sustainable future Strategies for growth

Private Company Services / Ninth annual Business Insights® Survey of Canadian private companies Building a sustainable future / Strategies for growth ...
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Private Company Services / Ninth annual Business Insights® Survey of Canadian private companies Building a sustainable future / Strategies for growth

Building a sustainable future Strategies for growth

How do you build a sustainable business? By growing. It’s that simple — and that complex. Every successful private company leader understands that profitable growth is the only way to ensure staying power.

www.pwc.com/ca/private

Ninth annual Business Insights Survey of Canadian private companies

Tahir Ayub Canadian Private Company Services Leader, PwC

In this issue 3

Introduction

4

Economic outlook 2013–2014

6

Key trends

8

Confident and ready to grow

14 Are we putting too much faith in the domestic market? 20

Welcome to the ninth annual Business Insights® Survey of Canadian private companies. In the summer of 2013, we surveyed more than 350 leaders of Canadian privately-held companies from across various industries to learn what they’re experiencing on the ground and how they see their businesses evolving and growing. We also asked about key challenges they face, how they’re performing today and what they’re doing to plan for tomorrow. Their responses may surprise you.

Conclusion

21 Methodology 22

Welcome to Business Insights A message from Tahir

Private Company Services contacts

Over the next few months, we’ll release a series of reports. Each will highlight a particular theme that emerged from our study—the first of which focuses on business confidence and future strategies for growth. At a time when the national economy is expected to grow at roughly 2% in the coming year, the private business leaders surveyed are forecasting an average growth rate of 7.6%. So what do they know that economists and media pundits don’t? Put simply, they know that stagnating isn’t an option. Finding out how they plan to grow and

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© 2013 PricewaterhouseCoopers LLP

where they’re setting their sights is important to securing a strong economic position for Canada. We’re committed to building a healthy community of sustainable Canadian private businesses that can play domestically and globally. The Business Insights Survey is one way for us to do just that. Our objective with this report is to gain a clear understanding of the current business landscape in order to generate ideas for creating a sustainable Canadian private sector. In that way, we all win.

Building a sustainable future | Strategies for growth

Building a sustainable future An introduction

77

%

More than three quarters of companies surveyed have been in business for more than 20 years.

25

%

One quarter of companies surveyed have been in business 50-plus years.

Focus on the domestic market Should Canadian private companies be broadening their horizons to the US and international markets?

How do you build a sustainable business? By growing. It’s that simple — and that complex. Every successful private company leader understands that profitable growth is the only way to ensure staying power. They also know there are many critical factors necessary to achieve profitable growth. It’s not as simple as entering new markets or adding new products—although that’s part of it. It starts with a strong foundation. You have to have the right people, processes, systems, equipment, technology and well-thought-out strategy. You have to execute and execute as efficiently as possible. These are basic truths this year’s respondents to the Business Insights Survey of Canadian private companies live and breathe every day. We know this because 77% have been in business for more than 20 years and one quarter of total respondents have been in business 50-plus years. This doesn't happen by accident. These private companies know what it takes to survive and thrive no matter the economic climate. That’s why the overwhelming majority are confident in their capabilities and are planning for significant growth. It’s a theme that’s played out since we first started polling Canada’s private company leaders in 2005 and it’s on full display in this year’s findings. The question is, are they doing enough to achieve their growth targets or are their strategies too conservative? When it comes to improving competitive performance, leaders realize there’s no one winning strategy, so they’re tackling the challenge on several key fronts. They’re becoming more efficient to further reduce costs. They’re improving staff skills and processes and getting even closer to their customers. In order to achieve their growth targets, the majority of leaders are looking to the domestic market — their key strategy is to enhance their marketing and sales outreach. While this is understandable given the stability of the Canadian market, it’s also cause for concern. With the US market rebounding and emerging markets poised for significant growth in the coming years, Canadian private company leaders may be missing an opportunity that their global counterparts will be only too happy to exploit.

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

David G. Watt Chief Economist, HSBC Bank Canada

Economic outlook 2013–2014 HSBC expects global growth to improve in the latter part of 2013 and through 2014. Overall, we continue to look for growth of 2.0% in 2013 and 2.6% in 2014. That said, HSBC’s current outlook reflects a more cautious increase in growth in the emerging world next year, versus a very slight increase in our growth forecast in the developed world. We continue to anticipate moderate growth in China, and somewhat slower expansions in India and Brazil. However, we also see somewhat better growth in 2014 in the Eurozone, and Japan. HSBC continues to expect the Canadian economy to grow by 1.6% in 2013, and for growth to improve to 2.2% in 2014. With regards to China, we look for GDP growth of 7.7% in 2013 and 7.4% in 2014, as the new leaders focus on financial reforms and eschew past tendencies to stimulate to offset headwinds. The result will be slower, but higher quality growth. In the Eurozone, we anticipate a return to positive, though still moderate, growth of 0.8% in 2014 (up from our prior forecast of 0.6%), as the almost relentless turbulence of the past few years has, to some extent, faded. That said, the global economy still has some vulnerabilities. We are particularly focused on emerging Asia, where growth fundamentals have gradually deteriorated, and where structural reforms are needed to put growth on a more sustainable path.

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© 2013 PricewaterhouseCoopers LLP

In the US, the government shutdown has thwarted our expected improved H2 growth performance. We estimate that the political stalemate that led to the 16-day partial government shutdown will lower Q4 GDP growth by about one-half of a percentage point. As a result, we now look for Q4 GDP growth of 1.9% quarter-on-quarter annualized. In the second half of the year, growth will average 1.9%, which is in line with growth in the first half of the year. The deal to end the recent shutdown includes provisions to fund ongoing discretionary government programs through 15 January 2014, and to lift the debt ceiling until 7 February 2014. A hoped for, “grand bargain” was not reached. Instead, Congressional parties have

Building a sustainable future | Strategies for growth

taken a “muddle through” approach. The result is a slower pace of growth, though it avoids the possible disruption of a Treasury default scenario. The potential fallout from the government shutdown, and for another round of brinkmanship in early 2014, have implications for the timing of when the Federal Reserve might decide to taper its monthly USD85 billion of asset purchases. While a December start for tapering is possible, it would take a US Congressional budget deal before 13 December, and a steady stream of economic data showing that job gains have picked up and that overall economic activity has begun to accelerate again. The risks are clearly tilted toward the Federal Reserve delaying a move to taper until sometime in the first quarter of 2014, when Janet Yellen will have replaced Ben Bernanke as Chair of the Federal Reserve. It is thus also unclear if the tapering can be completed by mid-2014. Though the market reaction to the political uncertainty was rather muted, the recurrent posturing, the soured relationship between the Administration, and Congress, and the schisms within the Republican party do foster uncertainty that the anchor for the global financial system is in danger of coming unstuck. It is important to emphasize that even once the Federal Reserve begins to taper, global monetary policy will remain very stimulative. Tapering is not a tightening of US monetary policy. In fact, former Federal Reserve Chairman Bernanke has highlighted a “lower for longer” attitude, and we do not expect the Federal Reserve to increase interest rates until, at the earliest, mid-2015. Meanwhile, neither the European Central Bank (ECB), nor the Bank of Japan, nor the Bank of England seems poised to re-examine their stimulative stances. If anything, more stimulus is likely, not less. ECB president Draghi has been unequivocally dovish recently, highlighting that possibility of further monetary easing. Similarly, the Bank of Japan has considered additional stimulus.

Turning to Canada, we look for moderate growth, and for inflation to remain quite low. Accordingly, we see little reason for the Bank of Canada to act on its longheld tightening bias. In our view, the Bank has already almost completely diluted its tightening bias, suggesting an extended period on the sidelines. We expect the Bank of Canada to remain on hold until at least late 2014. Before the Bank begins to tighten, we expect a rebalancing of the Canadian economy to become more firmly entrenched. With consumers exhausted, heavily in debt, and in need of a period renewed frugality, the economy is expected to be increasingly supported by business productivity-enhancing investment and exports. The rebalancing is projected to be a slow motion process and was little evident in Q2. Though the economy

Global trends

2.6

%

HSBC’s global forecast for growth for 2014 is 2.6%.

Accentuate the positive The Eurozone is expected to post a positive (though still moderate) growth rate of 0.8% in 2014.

All eyes on Capitol Hill The potential fallout from the government shutdown and the potential for another round of brinkmanship in early 2014 will have all watching the US situation.

grew by 1.7% quarter-on-quarter annualized, the consumer contribution to GDP growth was an outsized 2.1 percentage points, largest since 2010 Q4. As a result, households saved less, borrowed more, and the ratio of household debt to personal disposable income hit a record high of 152.9%. One sign of the anticipated rebalancing of the economy would be stabilization in this ratio. That has yet to occur, as Canadians still borrow too much and save too little. Healthy sustainable growth thus requires consumers to step back and business investment and exports to step up. We anticipate this to unfold in coming quarters, as corporate profits rebound, and as US economic growth supports Canadian exports. Progress on the rebalancing, however, is expected to be slow, amid our cautious outlook for growth.

Canadian trends

2.2

%

HSBC’s forecast for Canadian growth for 2014 is 2.2%.

Inflation isn’t inflating Inflation in Canada is expected to remain quite low in 2014.

High debt to income ratio The Canadian household debt to personal disposable income ratio has hit a record high of 152.9%.

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

Planning for a bright future Key trends The results from this year’s Business Insights Survey, conducted in the summer of 2013, show that Canada’s private company leaders are optimistic about the future. The majority (76%) are planning for growth and expansion in the next 12 months. What’s more, they’ve forecast an average 7.6% growth rate for the coming year—a much stronger forecast than the estimated 2% growth rate expected for the Canadian economy as a whole. In fact, 42% of all respondents report they’ve increased their projected growth rate from the last fiscal year. They’re taking control of that growth — focusing on improving their competitive performance by reducing the cost of operations (42%), improving staff skills (40%), improving processes (39%), better targeting of customers (38%) and retaining staff (33%). In other words, they’re covering all their bases in order to drive performance and growth.

When asked which issues posed barriers to growth in the last year, 40% of respondents cited the economy/lack of activity as the top challenge, followed by labour shortages/recruitment of skilled staff (25%) and decreasing market share/ increased competition (24%). Looking forward to the next 12 months, the economy remains a top concern for 38% of respondents, followed by labour (28%) and demand for products and services (25%).

What does this tell us? It tells us that Canada’s private company leaders are both confident and realistic about what they’re up against. They’re taking control where they can and they’re aware of the challenges that may come. Most important, they’re working to address those challenges now.

Twelve month strategy at a glance In the next 12 months, which one of the following strategies is your company striving for? Percentage of respondents

Growth / Expansion

Survival

Consolidation

Exit

100 80 60 40 20 0 2005

6

2006

© 2013 PricewaterhouseCoopers LLP

2007

2008

2009

2010

2011

2012

2013

Building a sustainable future | Strategies for growth

Priorities to improve performance

Top barriers to growth

Which do you consider to be the higher priorities for your business in order to improve competitive performance?

Which of the following business threats have been the primary barriers for growth over the past 12 months? Which will be the primary barriers for growth in the next 12 months?

Percentage of respondents

Percentage of respondents Top barriers in the past 12 months

42%

40

24%

%

Reducing costs of operations

Economy / Lack of activity

40% Improving staff skills

25%

Decreasing market share

Labour shortages

Top barriers in the next 12 months

39%

38

%

Improving processes

Economy / Lack of activity

38

%

25%

28%

Demand for products

Labour shortages

Better targeting of customers

33% Staff retention

24

%

Expansion plans





Our growth potential continues to be strong.

CEO, Canadian Private Company

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

Outlook for the future Confident and ready to grow Where business is headed Compared to the present situation, how do you expect your business to develop over the next 12 months? Will it ...? Percentage of respondents

78% Get better

18%

Stay the same

3%

Get worse

If there’s a single theme that runs through this year’s findings it’s this: private company leaders, both family-owned and non-family-owned, are confident about their performance and ability to grow going forward. Sixty-one per cent rank current business performance as good to excellent relative to their business plan, up from 51% in 2012. Compared to their competitors, 75% report they’re performing at strong levels, which is up 20% from last year. The difference a year makes This year’s respondents have also set much more ambitious targets than those surveyed last year. Almost half (45%) of respondents to the 2012 Business Insights Survey set growth targets of 6% or less. The focus was on enhancing internal efficiencies and taking as much control as possible to secure the foundations of their companies in order to ride out economic volatility. It seems, they’ve done just that and are now preparing to use those strong foundations to continue to grow.

38

%

of respondents report that targeting customers is one of their top priorities for the next 12 months.

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© 2013 PricewaterhouseCoopers LLP

How private companies are backing up their confidence “Private companies are basing their optimism on what they’ve been able to achieve in the past 12 months and what they’re already seeing in the market today,” says Tahir Ayub, Canadian Private Company Services Leader, PwC. “They’ve been successful because leading private businesses know what their customers are thinking, what they’re buying and what their customer pipeline looks like over the next 12 months. This year’s respondents are taking the pulse of their customers.” Thirty-eight per cent of respondents report that one of their top priorities to improve performance is better targeting of customers. When asked how they plan to achieve growth in the next 12 months, 38% cite improved customer experience, retention and loyalty.



Building a sustainable future | Strategies for growth



With our business model, additional revenues can be achieved without adding significant sales and administration costs, resulting in the gross margins dropping to the bottom line. This is a huge priority for us.



CEO, Canadian Private Company

Almost half (44%) of all private company leaders planning for growth cite improved sales and marketing campaigns as their top strategy. These same companies have a projected growth rate of between 10% and 14%. “This is particularly impressive in this slow growth economy,” says Ayub. “It demonstrates that private company leaders’ longtime focus on controlling costs and improving internal systems and processes has put them in a position where they’re ramping up efforts to drive revenues. And it’s working. There’s a clear connection between those companies citing improved sales and

marketing campaigns, and double digit growth expectations. I’ve seen it with my own clients.”

Companies whose plan for growth includes entering foreign markets have the highest average projected growth rate at 10%. “Canada’s market is relatively small and developed. The real opportunity to expand, grow sales and boost market share is by entering new markets,” says Ayub. “This also ties back to the increased focus on sales and marketing. Companies moving into new geographies have to get the word out about their brand.”

Those companies projecting more measured growth of between 4% and 6% are planning to grow by developing new products and services (34%) and investing in new technology (32%). “There’s no right or wrong approach to growth, but it’s telling that those companies taking an external path and looking to create a presence in foreign markets are more optimistic than those focused on internal improvement and the domestic market,” says Ayub. “If you want to grow significantly you either have to go where the economies are growing significantly or where you have better market share opportunities.”

Strategies for growth How do you plan to achieve growth? Percentage of respondents who expect to grow in the next 12 months

44

31%

%

Improved sales and marketing

38% Improved customer experience

New products and services

25%

Acquisitions

30% Improved internal systems and processes

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

Making mergers and acquisitions (M&A) a tool in your overall business plan One finding that remains consistent year over year is the lack of interest on the part of private company leaders to grow through a merger and/or acquisition. This year, only 1 in 10 respondents stated that M&A was essential to drive growth over the next three years and 44% said they have no plans to pursue a merger or acquisition. There are several key reasons to explain this; chief among them is the level of difficulty in structuring and executing successful deals. “It’s a lot of work and the last thing you want to do is take your eye off your main business objectives,” says Ayub. “That said, strategic buyers have established best practices and policies that both mitigate risk and ensure the business continues to run smoothly throughout the process. The fact is, M&A done right is an effective way to enter new markets, acquire market share, launch new products and grow significantly — often much faster than otherwise possible.”

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© 2013 PricewaterhouseCoopers LLP

The role of M&A What role will mergers and acquisitions (M&A) have in driving your company's growth over the next three years? Percentage of respondents

þ

?

ý

11%

45%

44%

M&A is essential to the growth of the company

Would consider a merger or acquisition if the right opportunity arose

Not pursing M&A, focusing on organic growth

Building a sustainable future | Strategies for growth

Take action

7 

components of an effective acquisition strategy

The big picture. Where do you want to be in five years and how can you most effectively get there? Consider all the options for growth open to you.

An execution strategy. A big part of executing well is getting buy-in and communicating your overall strategy. Effective due diligence will include a laser focus on the target’s key value drivers and risk exposures.

The right candidates. Analyze the market and assess the potential targets that will help you achieve your goals and make sense in terms of size and valuation.

An understanding of the seller’s perspective and goals. This will improve your chances of moving forward successfully.

Money. This may be a mix of access to fresh equity capital and access to debt.

The creation of a common corporate culture. Critical to getting an acquisition right, this takes time and planning. Understand cultural differences going in to make sure you’re able to merge them.

Time. The earlier you start talking to owners and putting your stake in the ground, the better.

For more information on how you can grow through acquisition, read Advancing the Growth Agenda in PwC’s Let’s Talk series of articles. pwc.com/ca/private

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

Why business will get better in the near term The overwhelming majority (78%) of respondents planning for growth believe their business will get better in the coming year. When asked why, the top response cited by 55% of private company leaders was improved sales. This finding ties directly to their renewed efforts on sales and marketing. The second reason for their positive outlook was market share gains, cited by 44% of respondents, followed by the economy (37%). Private companies are building and extending their brands to drive revenue, which will in turn help them gain market share. The fact that the economy is also a cause for optimism likely speaks to the age and experience of the respondents, says Ayub. “More than three quarters (77%) of companies surveyed have been in business 20 years or more and 25% have been in business 50 years or more. They’ve come through recessions and downturns and know how to turn challenge into opportunity. In 2012, only 19% of respondents cited the economy as a reason for their business to get better. This is a good news story. Private companies are the backbone of the Canadian economy and if they’re positive about the future, we should be seeing improvements in the domestic economy over the next 12 to 18 months.”

The power of a strong balance sheet Hard-won experience has also led private company leaders to protect their cash flow and maintain a healthy balance sheet in order to position themselves for growth. Year over year, private company leaders don’t plan to access new financing outside their existing sources of capital to fund growth and this year’s findings continue that trend. In fact, only 40% plan to access additional financing to fund growth and, of these respondents, 71% intend to fund this growth with a bank loan. “More private companies should consider using their strong balance sheets to lock into historically low long-term lending rates,” says Ayub. “Three years from today, if you need several million dollars in long-term financing, you may not be able to afford it. The fact is banks are looking to lend today. It’s a good opportunity and smart strategy.”

Planning to access additional financing

Business projections for the next 12 months Reasons why companies expect business to get better in the next year. Percentage of respondents

55% Improved sales

44%

Gain market share

37% Economy

31%

Do you plan to access additional financing in the next year to fund growth? Percentage of respondents

27%

Entering new market(s)

Developing new products

9%

Don't know / prefer not to answer

40% Yes

51% No

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17% Gut feel

vs Funding growth: cash or debt? When does it make the most sense to take advantage of low-lending rates, rather than using cash flow to fund business activity?

“If your balance sheet is strong (meaning your business is not highly levered and has capacity to take on additional debt) then this is the right time to access debt financing, particularly if you are in growth mode,” says Brooke Valentine, Managing Director, PwC Corporate Finance Inc. “It’s a good time to fund an acquisition, capital expansion (equipment), organic growth in the form of opening a new office or facility and to fund shareholder buy-outs. If you have more expensive debt, then now is the time to consider refinancing.” Why? Two reasons: historically low interest rates and the fact that banks are being very aggressive in terms of how much and on what terms they will lend. “There’s no cheaper form of capital than senior bank debt today,” says Valentine. “Banks want to lend and they’re being flexible to get your business. For example, we’re working on a transaction where a shareholder, who along with his wife, own a 78% equity stake of a business and they’re selling half their stake back to the company. To finance the transaction, the company is taking on additional bank debt. The bank is only requiring two covenants because of the strength of the company’s balance sheet and cash flow. The rate is prime plus 1% which is equivalent to 4% in today’s market.”

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

Looking beyond borders Are we putting too much faith in the domestic market? The findings tell us that while Canada’s private business leaders are looking for new opportunities to grow, they’re largely focused on the domestic market. And for a very specific reason: when asked which markets have the strongest potential for growth over the next five years, 60% of total respondents cited Canada because of the nature of their product or service (61%), their capacity to serve the market (46%) and demand (41%). This may point to the fact that the majority of respondents are in traditional industries such as manufacturing, wholesale distribution, retail, engineering and transportation.

Growth potential of domestic and foreign markets Thinking about your strategy over the next five years, which of the following markets has the strongest growth potential for your company? Percentage of respondents

60%

6%

Domestic

Developed foreign markets

24%

10%

US

14

© 2013 PricewaterhouseCoopers LLP

Emerging foreign markets

“This ultimately tells us that consumers—both industrial and individual buyers—are spending, which isn’t what the economists are telling us,” says Ayub. “There’s a disconnect and it may be that private company leaders continue to focus on strategies that are tried and true and what’s worked in the past. The reality is that it’s a global marketplace and Canada represents 3% of global trade, yet only 17% of respondents in growth mode are planning to enter new foreign markets in the next 12 months. It’s a message I’ve shared in these pages before: business leaders need to think bigger if they want to grow because they need to carve out their place on the world stage. That’s what other nations are doing and we can’t afford to be left behind.” Companies that do generate revenue from foreign markets, which is the case for 44% of this year’s respondents, have a higher average projected growth rate (8.3%) than those companies that do not (7%).

Building a sustainable future | Issue 1: Strategies for growth

17

%

Only of respondents in growth mode are planning to enter new foreign markets in the next 12 months.

Reasons for a focus on domestic market Why do you feel the domestic market has the strongest growth potential for your company? Percentage of respondents who selected the domestic market

61

%

Nature of product / service

46%

Capacity to serve the market

41

%

Specific market demand

% 17 20% 10 Growth rate of the market

% Size of the market Amount of competition

© 2013 PricewaterhouseCoopers LLP

8%

Regulatory environment

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Ninth annual Business Insights Survey of Canadian private companies

As I see it: Expanding and growing in foreign markets

Today, Ingenia Polymers is a respected global supplier of chemical and plastic raw materials and specialized products for multinational petrochemical manufacturers. It also manufactures its own brand of materials for downstream converters; companies that make flexible packaging films, greenhouse film, shopping bags, packaging film for convenience foods, automotive tanks and gas pipes for example. It has operations in Canada, the United States, Mexico, India, the Kingdom of Saudi Arabia, the United Arab Emirates and Luxembourg. More than 80% of revenues come from its foreign operations.

John Lefas, Founder

The decision to expand beyond Canada’s borders was made many years ago, early in the life of the company and was largely driven by market conditions. The North American Free Trade Agreement opened up trade between Canada, the United States and Mexico. “The great majority of our customers began looking at the United States and Canada as one entity. That meant we had to satisfy their needs in a much broader way,” says Lefas. “In this industry, you have to be in your customers’ backyard because the cost of freight is high and you have to be able to quickly deal with technical issues and service. We couldn’t afford to appear to be seen as a regional company.”

Ingenia Polymers

How do you grow your business when you’ve already achieved high penetration rates in your home market? It’s a question John Lefas, founder of Ingenia Polymers, first faced back in the 1990s. In the early days, the company produced powders for the rotational molding industry from a plant established in 1986 in Brantford, Ontario. It was a small beginning but within three years a second plant was up and running in Calgary. In 1993, it entered the United States with a plant in Dewey, Oklahoma followed by another in Houston, Texas and a sales office in Mexico.

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At the same time, Ingenia Polymers had outgrown the limited scope of the Canadian market. New growth opportunities had to come from somewhere else and the United States was a natural place to start. “We knew if we limited ourselves to Canada we would be restricting our opportunity to grow. It was a case of ambition plus need. If you don’t grow, you stagnate,” says Lefas.

Building Buildingaasustainable sustainablefuture future|| Strategies for growth





Our customers are global, we need to follow them. John Lefas Founder, Ingenia Polymers

Ingenia Polymers found itself in another grow or stagnate situation seven years ago. In North America, the industry was starved for the supply of a key raw material: gas. “No one was investing in new petrochemical plants to build capacity here because of the lack of resources,” says Lefas. “We started looking around for the next logical place to grow.” Several of Ingenia Polymers’ customers encouraged Lefas and his team to follow them to the Middle East where they were investing heavily. The area has a plentiful supply of hydro carbons and it has been in rapid growth mode. “We spent three years scouting around, built elaborate analysis and multi-year strategic growth plans and learned all we could about the area, how business is conducted, what our existing and potential customers were buying, their growth prospects and demographics. Good planning is critical when entering any new market. We reviewed the plan with PwC, our bankers and everybody here to make sure it made sense.” Unlike its customers, Ingenia Polymers didn’t enter into a joint venture, opting instead to build a substantial plant on its own in Saudi Arabia. The decision came down to being able to ensure uniformity of interactions for its global customers. “It’s difficult to introduce a joint venture partner in one locale when you’re wholly owned in other regions of the world,” says Lefas. “Going alone was very difficult and very unique in this industry. We’re still in the early stages but we feel positive about our decision.”

Relationship, knowledge building and a willingness to adapt and assimilate to new environments have been critical to Ingenia Polymers’ success. “Wherever we go as a mid-size company, we have to integrate with the local community. A large multinational can create its own eco-system. A company our size has to put in the effort to adapt and assimilate.” To that end, Lefas and his team spent time talking to local governments, bankers, embassies, collecting information and reaching out to clients, suppliers and communities. “It takes time and effort to get into the skin of a culture. We use the same process everywhere we grow. We try to be analytical and strategic, numbers based but with sensitivity to the local cultural environment, history and future aspirations.” It’s working. Ingenia Polymers is in growth mode, scouting out new opportunities in the Americas, Southeast Asia and Europe. “Our customers are global; we need to follow them. We have an established model of how to assess a new market and we now have a global reputation. People know and trust us,” says Lefas. “Establishing ourselves outside of Canada is what has allowed us to grow. If you’re only in one place it’s like building a stool with one leg. Expanding globally helps you mitigate risk and grow. It also gives you better access to talent and growth opportunities for your people.”

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

What to consider when expanding outside Canada’s borders Comprehensive, multi-year strategic plans outlining customer demand, growth prospects, competition and demographics. A clear understanding of how business is conducted in the new market. Relationships on-the-ground with local government, banks and suppliers. Time in the region to gain as much knowledge as possible. Access to talent. A willingness to adapt and assimilate. An understanding of the tax and regulatory environment.

Opening borders and encouraging trade is an opportunity for Canadian business It’s estimated that the trade agreement between Canada and the European Union—the biggest deal since the Canada-US free trade agreement— could help Canadian exporters create more than 80,000 jobs while giving Canadian private companies greater access to 500 million consumers. Let that number sink in. Unsurprisingly, private companies planning for growth want that access and opportunity. In terms of economic size, the European Union is comparable to the US, meaning similar number of consumers and opportunities to sell. While there is opposition to this current deal—just as there was to the Free Trade Agreement with the US—the fact is Canadian companies not only can compete successfully on the world stage, they have to if they want to grow significantly. Perhaps even more important, international competition forces everyone to up their game and that’s a good thing for business, the economy and consumers.

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© 2013 PricewaterhouseCoopers LLP

Hello neighbour: Why private companies should explore the US market Some 24% of respondents believe the US has the strongest growth potential for their company over the next five years. Of those who are already generating revenue outside of Canada, 73% export to the US. These same respondents report that on average, US sales account for 31% of revenue. When asked why they’ve been successful in the US, they cite similarity of markets (46%), location/convenience (25%) and establishing operations in the US to stay closer to clients (23%). Still, there are challenges to doing business with the world’s largest economy including the high value of the Canadian dollar (48%), policies and regulations (32%) and taxation (24%). The US is the number one economy right now. Even if China were to overtake the top spot, the US is expected to remain one of the strongest developed global economies in the world for the foreseeable future. In other words, businesses that aren’t exploring moving into the US market are limiting their own growth potential, says Ayub. “For Canadian businesses specifically, our geographic proximity, cultural similarities and shared language make the US an ideal trading partner. We’ve got a ready market of sophisticated consumers with significant buying power at our doorstep. The US market is 10 times that of Canada. Its economy is growing and its state and federal governments are doing all they can to bring manufacturing back into the country and attract new businesses to set up shop there. This is the time to at least explore doing business in the US.”

Emerging markets = growth potential Only 10% of respondents cite emerging foreign markets as having the strongest potential for growth over the next five years and just 12% of respondents currently export to these markets. When you consider the rise of BRIC (Brazil, Russia, India and China) and other emerging nations, combined with the expectation that emerging foreign markets will be home to one billion new middle-income consumers in the next 10 years, Canada’s private company leaders are missing a huge opportunity to grow. “This is about revenue and Canadian companies are placing limited bets on emerging foreign markets. It’s small thinking. Those new consumers will demand products and services and other countries will meet that demand,” says Ayub. “Bottom line: Canadian businesses should continue to evaluate the pros and cons of doing business in emerging markets. It’s a risk not to start assessing these markets as places to grow.”



Expanding our operations in the US has allowed us to offer a broader range of services to our clients and to capture US client business.



CEO, Canadian Private Company

Building a sustainable future | Strategies for growth

Take action

Make US tax planning part of your go-to-market strategy

Almost a quarter of this year’s survey respondents have made the US market a key part of their strategic growth. Two specific reasons were cited: the market is bigger than Canada’s and demand in the US is still strong. Although they see opportunities for growth in the US, almost a quarter of respondents already doing business in the US cite taxation as one of the top three challenges they face. It’s easy to understand why US taxation is considered an obstacle when you look at what it takes to comply with US tax regulations. “For example, not only do you have to consider US federal income taxation and the Canada-US Tax Convention (Treaty) implications, you also have to keep in mind there are 50 states and thousands of sub-jurisdictions with their own tax laws and requirements,” says Melanie Kurk, Senior Manager, US Tax Services, PwC. “Many of our clients start doing business in the US and quickly realize they’re in multiple jurisdictions. It’s a common misconception that if you set up an office in, say, New York, you only have to be concerned about tax laws in that state.” “When you’re considering expanding your business in the US, try to determine your ultimate goals,” says Kurk. “Do you want to pass the company on to your children? Will you want to sell it? Think about what your exit strategy might be so you can begin planning from a tax perspective as early as possible. Early planning is the key to avoiding complications down the road.”

If you decide to expand your business into the US, being proactive from a tax planning perspective can help you avoid problems and save money going forward. Here are a few key facts you should know: There are different types of taxes to consider such as Federal, state, city and county-level taxes, which can all be significant. For example, in addition to income taxes, capital-based franchise taxes, sales and use taxes, excise taxes and gross receipts taxes can also be imposed. A tax advisor with comprehensive knowledge of US tax laws and regulations can help you navigate the complexity. The US corporate tax rate is now higher than Canada’s. “Be sure you have supportive transfer pricing policies in place so that you can minimize your US taxable income base and your tax bill,” advises Kurk. It doesn’t take much to be considered doing business for US tax purposes. For example, if as a Canadian company, you have sales reps in the US visiting customers and end up selling to those US customers, the IRS may consider this as conducting a US trade or business. “Even if you have no US permanent establishment (PE), you have to meet disclosure requirements,” says Kurk. “At the federal level, this is called a US Treaty-based return and the IRS can potentially impose a $10,000 penalty for each failure to disclose a US Treatybased filing position.” Filing a US Treaty-based return isn’t always enough. Many states don’t follow the Treaty and require separate state tax filings. You don’t need a bricks-and-mortar presence to be deemed to have a US presence for tax purposes. “This is particularly important for service-based businesses that often have employees onsite with their US clients,” says Kurk. “If you’re in the US for more than 183 days in any 12 month period (this can span two fiscal year-ends) the Treaty may deem you to have a US permanent establishment. This will have implications both for the business and the individual’s personal income tax filing.”

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US federal, state or local tax penalties.

Doing business in the US can also affect executives and employees travelling to the US. For example, it can have implications for Canadian and US personal income and estate taxation and planning, as well as your exit strategy.

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

Building a sustainable future Conclusion Confident, optimistic with reason, but still too tied to Canadian markets. If there’s a tagline for this year’s survey findings, that’s it. In many ways, it’s the continuation of the theme that has evolved since the financial collapse of global markets in 2008. Canada didn’t experience the same drastic downturn other nations did and so private company leaders dug deep, looked inward and continued to focus on the strategies that had served them well. They focused on securing the foundation of their business and in the process they’ve positioned themselves for growth in Canada. Some have turned to the US, a logical move, but few are looking to international markets. With the volatility of global economies, this conservative approach is understandable, but it’s a short-term solution. The title of this report is Building a sustainable future. The first step in achieving this is for private companies to continue doing exactly what they have been doing — enhancing their value proposition, streamlining processes, building efficiency into operations and serving their existing customers. But Canada is a relatively small, developed market and growth is slow. This approach is limiting and restricts potential. If you want to grow, you have to go either where economies are growing, or where you have better market share opportunities. Of course, entering foreign markets has its challenges. But with the right strategy in place, the opportunities for growth are infinite.

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© 2013 PricewaterhouseCoopers LLP

Building a sustainable future | Strategies for growth

The fine print Methodology and demographics The ninth annual Business Insights Survey examines issues affecting Canadian private companies. In the summer of 2013, 352 participants from across Canada completed the survey. Business leaders from a broad range of industries, of various sizes and locations were questioned about their strategies. The survey sample is concentrated around four provinces —British Columbia, Alberta, Ontario and Quebec.

Geographic location

1. A probability sample of the same size would yield a margin of error of +/-5.22%, 19 times out of 20.

Where is your company headquartered?

Participant demographics

Employees

Survey participants represent a wide range of revenues, locations and industry sectors.

13% of companies surveyed have fewer than 50 employees, 22% have between 51 and 100 with 66% having more than 101 employees.

Revenues Of 352 companies surveyed, 48% have revenues between $10-50 million and the remaining 52% have revenues over $51 million.

Company age 4% of companies have been operating for less than 10 years, 18% between 10 and 19 years, 52% between 20 and 49 years and 25% over 50 years.

Percentage of respondents

25% Ontario

22% Alberta 1% Nova Scotia

3% Manitoba

1% Saskatchewan

1% Nfld / Labrador

22% BC 25% Quebec

Number of employees

Revenues

Age of company

How many people does your company employ?

What was your revenue in the last financial year?

How long has your company been operating?

Percentage of respondents

Percentage of respondents

Percentage of respondents (CAD) 13% Fewer than 50

11% 1,001+

4% 751–1,000 10% 501–750

22% 51–100

18% 251–500

22% 101–250

48% $10 to $50 million

1% 0–4 years

6% $501 million+

9% $251 to $500 million

16% $101 to 250 million

21% $51 to $100 million

18% 10–19 years

1% N/A

25% 50+ years

3% 5–9 years

52% 20–49 years

© 2013 PricewaterhouseCoopers LLP

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Ninth annual Business Insights Survey of Canadian private companies

About PwC’s Private Company Services (PCS)

More than 65% of PwC Canada's clients are private companies, ranging from high net worth individuals to owner-managed family businesses and large, professionally-managed businesses. PwC's Private Company Services (PCS) group is a dedicated team of advisors who help private company owners resolve day-to-day business issues, create value and achieve long-term success. PCS offers the perspective of a third party with professional insights, business and technology consulting, deals, tax and accounting expertise. For more information about PwC's Private Company Services, please visit www.pwc.com/ca/private.

Interested in learning more about our services or the business issues discussed in the report? Contact one of our subject matter experts or your local PwC advisor for more information. Subject matter experts

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Tahir Ayub Canadian Private Company Services Leader 604 806 7502 [email protected]

Melanie Kurk International Tax Services, US 416 869 8777 [email protected]

Brooke Valentine Corporate Finance 416 687 8141 [email protected]

PricewaterhouseCoopers Place 250 Howe Street, Suite 700 Vancouver, British Columbia V6C 3S7

PwC Tower 18 York Street, Suite 2600 Toronto, Ontario M5J 0B2

PwC Tower 18 York Street, Suite 2600 Toronto, Ontario M5J 0B2

© 2013 PricewaterhouseCoopers LLP

Building a sustainable future | Strategies for growth

Private Company Services Local contacts Canadian Private Company Services Leader Tahir Ayub 604 806 7502 [email protected] PricewaterhouseCoopers Place 250 Howe Street, Suite 700 Vancouver, British Columbia V6C 3S7

Greater Toronto Area

National Capital Region

Sydney

Frank Magliocco 416 228 4228 [email protected]

Marc Normand 613 755 8733 [email protected]

Rita Anderson 902 564 1472 [email protected]

Jason Safar 905 815 6399 [email protected]

99 Bank Street, Suite 800 Ottawa, Ontario K1P 1E4

500 George St, Suite 220 Sydney, Nova Scotia B1P 1K6

428, rue Notre-Dame Gatineau, Québec J8P 1L8

Truro

Calgary

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Ian Gunn 403 509 7543 [email protected]

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Edmonton

York Region 400 Bradwick Drive, Suite 100 Concord, Ontario L4K 5V9

David Bryan 780 441 6709 [email protected] Toronto Dominion Tower 10088 102nd Avenue NW, Suite 1501 Edmonton, Alberta T5J 3N5

Fraser Valley Leo Smyth 604 495 8941 [email protected] 13450 102nd Avenue, Suite 1400 Surrey, British Columbia V3T 5X3

Halifax Mike Anaka 902 491 7442 [email protected] Dean Landry 902 491 7437 [email protected] 1601 Lower Water Street, Suite 400 Halifax, Nova Scotia B3J 3P6

London Chirag Shah 519 640 7914 [email protected] 465 Richmond Street, Suite 300 London, Ontario N6A 5P4

Montreal Yves Bonin 514 205 5220 [email protected] 1250 Rene Levesque Boulevard W. Suite 2800 Montreal, Quebec H3B 2G4

Quebec City Thomas Bouchard 418 691 2448 [email protected] Place de la Cite, Tour Cominar, Bureau 1700 2640 Boulevard Laurier Sainte-Foy, Quebec G1V 5C2

Saint John Simon Kent 506 653 9400 [email protected] 44 Chipman Hill P.O. Box 789 Saint John, New Brunswick E2L 4B9

Saskatoon Lee Braaten 306 668 5968 [email protected] 123 2nd Ave South, Suite 200 Saskatoon, Saskatchewan S7K 7E6

St. John’s Ron Walsh 709 724 3778 [email protected] 215 Water Street, Suite 802 Box 75 St John’s, Newfoundland A1C 6C9

Nancy Frame 902 896 4357 [email protected] 710 Prince Street Truro, Nova Scotia B2N 1G6

Vancouver John Bunting 604 806 7797 [email protected] PricewaterhouseCoopers Place 250 Howe Street, Suite 700 Vancouver, British Columbia V6C 3S7

Waterloo Glen Dyrda 519 570 5715 [email protected] 95 King Street South, Suite 201 Waterloo, Ontario N2J 5A2

Windsor Giancarlo Di Maio 519 985 8911 [email protected] 245 Ouellette Ave, Suite 300 Windsor, Ontario N9A 7J4

Winnipeg Danny Wright 204 926 2427 [email protected] One Lombard Place, Suite 2300 Winnipeg, Manitoba R3B 0X6 © 2013 PricewaterhouseCoopers LLP

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www.pwc.com/ca/private

© 2013 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 3554-01 1013