How to let go of the company you spent your entire life building

How to let go of the company you spent your entire life building

A bird’s eye view of ownership transfer

In April of this year, Halifax’s Corporate Research Associates (CRA) relaunched as Narrative Research. On the surface, the rebranding of the market research and intelligence company focused on its revised approach to market insights, but underlying this was an even greater change. Just a few months before, Don Mills (who founded the company out of university 40 years ago), had transferred ownership in a management buyout that saw three new partners assume control.

The sale was a masterpiece of succession planning. From the beginning, Mills had wanted his company to be owned by the employees who had helped him build it, even if that meant a lower sale price. To that end, he began putting his pieces in place as far back as 2003 when he sold the first shares to employee Margaret Brigley. In 2009, he sold some more to Peter MacIntosh, and that was when Mills began planning his succession game for real.

HE SAID
“I knew that one of the challenges that most businesses have is that owners don’t do a good job planning for what they are going to do when they get to the end of their career, and I didn’t want to be like that,” Mills says.

He reasoned that if Brigley and MacIntosh were equity partners, it would get them thinking as owners. “I wanted them to have the experience of ownership as part of the process of hopefully eventually doing a management buyout. That was the starting process, getting them involved with the strategic elements of planning for a business and looking at the financial information differently, and getting them that training over a period of years,” he explains.

This also gave Mills time to mentor his partners, especially Brigley. He increased her responsibilities. She became COO, and for the last five years before the sale, company president. Next, Mills began gradually transferring client relationships. This was an important consideration for a professional services business, he says. “If you can maintain those relationships, then the business is worth something and has a good future.”

Mills wanted to ensure the company’s continued strength after he left, so he deliberately set out to make himself irrelevant. “It’s a hard thing to do, as the owner and the founder. It means giving up control of some things, but it was the only way that the business could be viable and grow, and the company is in extremely good shape as a result of that effort, that planning process,” he says.

Next, knowing that management’s ability to buy him out would be limited, Mills also had to figure out a way to make a deal financially possible. A strong balance sheet with lots of cash in the business would help. Over that ten-year period, he began leaving money in the company, funds that, as majority owner, he could have taken out. “I wanted to make sure the company had no debt and a very healthy balance sheet with a fair amount of cash that would help in the sale of the business. So that was the first thing. We had a fairly good reserve of liquidity and no debt.”

The second thing was structuring a deal which did not require a large financial output from Narrative Research’s new owners. Consequently, the company’s redundant assets were used to partially fund the buyout, and Mills arranged for the remaining value to be paid over time. “I made those terms extremely attractive so they didn’t have to worry about holding the company hostage in terms of paying a large amount of money out, and so the company would not be hurt by that process,” he says.

The majority of these moves were taken well before Mills and Narrative Research’s new owners—Margaret Brigley, Peter MacIntosh and Margaret Chapman—had even sat down together at the table to negotiate.

Reflecting back post-sale, Mills says, “I feel good about everything. I think they feel good about everything. I think the succession plan worked out as well as it possibly could, at least to this point, but that’s because it was well thought out frankly, and it was planned for. It didn’t happen suddenly, there was no urgency. I’m really happy about the fact that our personal relationship is basically unchanged, and I think that is the most telling way of knowing that it was a good deal for both sides.”

SHE SAID
Margaret Brigley, Narrative Research’s new CEO and majority partner, remembers the last decade before the sale as one in which she felt Mills was preparing himself for departure. For example, she saw him take vacations for the first time. “I’ve been here more than 20 years, and I can tell you that initially, he did not take time off. He just couldn’t let go.”

Although there was talk of a potential management buyout throughout the years, Brigley respected Mills’ right to decide when. “When you have someone who started a company and took it through to 40 years, it has to be the right time for him. …There is a lot of emotion involved in the transition when it’s your company, so his exit strategy had to be just that—the one that best aligned with what he needed to do personally,” she says.

Once he made that decision, Brigley says she, MacIntosh, and Chapman worked collectively to respect the timeline he had chosen: “It’s a very difficult decision I’m sure for him to make such a change, and the three of us wanted to do everything that we could to make sure it was as smooth a transition as possible.”

Two years ago, Don Mills was ready to start talking. For the first year, it was just the four of them at the table. They discussed the company’s value, using the same formula previously employed to determine share value, they looked at tax implications and they drew up the outline of a partnership agreement for the new owners. Brigley also remembers that year as a time when Mills’ future role in the company—and the question of whether he would retain a level of ownership, was determined.

During the day, however, it was business as usual. “We started trying to figure out the process and what it was going to look like and when it was going to happen. And we were all working together in the same way we had been working together for decades, while also having these business negotiations. So part of the complexity is trying to negotiate the details of how it’s going to proceed, like price, and valuation and the handover, while you’re still working together as colleagues,” recalls Margaret Chapman, now COO.

For her, it was the beginning of a steep learning curve. “There were more meetings and negotiations than I knew there would be. There was a lot of energy that went into thinking things through and thinking about the consequences of how we were going to structure things. It wasn’t ever heated, it just took a lot of time and energy to work everything through. It was consuming,” she says.

When Chapman contacted Gavin MacDonald of Cox & Palmer to tell him she was considering entering the deal, he warned her that it was going to be a much longer and more complex process than she thought. “And he was absolutely right,” she says.

Margaret Brigley agrees. “It’s like you know where you want to go and everyone wants to get there, but it takes time. There is a lot involved, which is why you turn to your legal counsel, who has the expertise to get the job done. We relied on them 100 per cent to help us navigate the process,” says Brigley.

Chapman says the help her legal team provided was invaluable, not only for clarifying the legal jargon and explaining what she was signing and why, but also for their foresight. “The benefit of having professionals who deal with these kinds of deals all the time is that they think of things in contingencies I would have never thought of. ‘What happens if this happens? And what are you going to do if that happens?’ All the potential things that could happen in a deal are included in the documentation as well,” she says.

Still, the process remained amicable, says Brigley: “The positive thing here is we have such a longstanding relationship. To be able to go through a process like that and continue to have a strong relationship is hugely positive.”

After many months, the four agreed on the broad terms of the deal and drew up a letter of intent. It was time to bring in the heavy hitters. Narrative Research was still one year from being sold.

THEY SAID
By early 2018, all the players were present—Mills’ accounting team, the purchasers’ accounting team, his legal team, their legal team, and the purchasers’ individual counsel for their partnership agreement. The next phases of the process began: a period of due diligence in which the financial and legal advisors combed through the company’s documentation and performed legal searches to confirm there were no hidden liabilities, and the drafting of the binding agreement of purchase and sale. Mills’ accounting team went to work on structuring the most tax advantageous deal for him.

Gavin MacDonald, Chapman’s lawyer, has worked on multiple deals over the past 17 years for both vendors and purchasers. He says the first thing he advises clients to do is to get an independent assessment of the company’s value. “Even if you’re leaning towards selling it to your long-time management, you want to make sure that you’re getting a fair price for your labour of putting the business together. I would generally recommend some kind of process whereby you’ve at least tested the market for what it’s worth or gotten some research on what businesses similar to yours generally sell for.”

Mills’ financial advisor, Grant Thornton’s Matthew MacAdam, recommends hiring a chartered business valuator (CBV) from the get-go. “Many business owners may have a sense of the value of their business based on general market knowledge, past transactions, or just their ‘gut feeling’, but they should seek to augment this with some independent advice… In many cases, a CBV can also help in other stages of the sale process, from assisting with the identification of potential advisors and the negotiation of the sale to assisting with the due diligence process and eventual closing of the deal,” he explains.

After that? “Go get good tax advice,” says MacDonald. He says that taxes will often be the driving factor in the structuring of the deal.

MacAdam, whose background is in tax, highlights the difference between a shares sale and an assets sale. From the vendor’s perspective, the structure of their business and the structure of the sale transaction can have considerable impact on the after-tax proceeds the vendor will retain.

“For instance, it is often the case with sales of Canadian private businesses that a sale of the shares of the business can be most advantageous to the vendor, compared to a sale of assets. This is because of the tax-efficiency of capital gains compared to other types of income, and the possibility of using the vendor’s enhanced capital gains exemption to shelter some of the proceeds from tax. In fact, despite recent changes to our tax system that reduced the ability for private business owners to income split with family, the ability to income split on a sale of shares of certain qualifying small businesses still exists, as does the ability to access capital gains exemptions of family members if the ownership of the company is properly structured,” he says.

In contrast, purchasers often prefer to acquire assets rather than shares because of various business risk considerations and also tax advantages for the purchaser. But not to worry, says MacAdam—if a share sale is not an option, an asset sale can still be tax-efficient to the vendor, particularly if much of the company’s value is in reinvested earnings and if the vendor has the ability to leave proceeds from the sale in the company and draw it out over future years, achieving a possible deferral of tax.

When should owners start planning for succession? MacDonald recommends vendors give themselves lots of “runway” in terms of time, usually at least two to three years. “That’s the time to start implementing conversations with your potential successors, either within your family or in your management team. And for taking advice, talking to your lawyer, talking to your accountant, and figuring out what it’s worth, what you need and what your requirements are,” he says. There may be structures that need to be put in place or changes to the way the business is operated that take time to implement, and which, if not done, could mean leaving money on the table.

Time is also essential for arranging the best tax options, says MacAdam. “Many times, business owners make their way to a sale transaction only to realize that significant planning is needed to reorganize the company to make the sale tax-efficient. This can be, for example, if the company needs to be ‘purified’ to move assets not used directly in the core business in order for the shares of the company to qualify for capital gains exemption. Another example would be a restructuring of ownership to a trust or to individual family members to allow them to share in the proceeds.”

MacAdam warns that if this planning is left to the last minute, it may not be possible to execute it effectively in advance of a sale. As well, some complex tax rules can prevent a small business owner from undertaking certain planning if it is being done in contemplation of a sale. For these reasons, starting early and undertaking planning for a future exit transaction, even if that may be far off on the horizon, is very important.

Then there is the thorniest issue of all—determining the role of the vendor post-sale. While some vendors may just want to take their money and ride off into the sunset, there is often a desire for the vendor to stay on, at least in the short term, to help with the transition and the transfer of knowledge and client relationships. Other times, it is a matter of legacy.

MacDonald normally warns against this: “That can be really difficult because there’s this real tension between the people who have paid to buy the business and the feelings of the person who used to run it, who really identifies with the business and how it’s run. I have had more fraught negotiations over employment agreements related to those sorts of things than anything else,” he says.
In the case of Narrative Research, Mills has stayed on as chairman of the board and senior counsel.

IN CLOSING
CRA was founded in December, 1978. On December 31st, 2018, its 40th anniversary, it was sold. The final part of its sale process, the closing, in which all the transfer documents were signed, was also textbook, according to MacDonald “Usually, you want to transfer ownership at a clean cut off, like the end of a month or the end of an accounting period, just to make the books simple to do.”

For Don Mills, it was just symmetry: “It was a nice way to wrap it all up and tie it with a bow,” he says.

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