Arno Tatto spent decades working for, building and eventually owning KD Engineering Co., a Burnaby, B.C., firm that tests and calibrates the complex heating, ventilation and air systems that run in big buildings.
When it came time to sell the company and take a back seat as an advisor, he wanted to make sure the transition was anything but complex.
“The company started in 1967 and I came on board 10 years later, and about 14 years ago I took over as majority shareholder. Now I’m old and I have other priorities,” says Tatto at 69.
“We looked at different options for the company’s future and luckily, we engaged a firm to guide us through the transition. They helped us find a family office as a buyer,” Tatto says.
“The choices we looked at included an employee ownership buyout, but we were worried that there might be layoffs. Other choices raised concern that the buyer would simply flip the business. We didn’t want that — I had never laid off anyone. The advisors found us a door No. 3,” he explains.
‘Buyers who share their values’
Door No. 3 is a family office, which bought Tatto’s firm in a deal navigated by Vancouver-based VEER Business Advisors Ltd., a firm that specializes in business transitions.
VEER stands for Value Enhancement and Exit Readiness, explains Bob Lawence, the transition firm’s founder.
It can be a long process matching a business owner with a buyer that will not only come up with a fair price and sound financing, but also match the selling owner’s long-term goals, he says.
“We talk to owners as early as three to five years before they plan to sell and ask them why and what their objectives are. Some owners simply want to get the highest price, but others are more focused on the legacy of their business,” Lawrence says.
“The next thing we discuss is who the likely buyers are, so the sellers understand how different types of buyers might perceive the value of what they’re considering purchasing,” he says.
‘Every seller is different’
“Every seller is different,” says Julie Afanasiff, Managing Partner at Sequeira Partners, a Western Canada-based deal advisory firm.
“Our preference is to meet with sellers early on in the process and get to know them over a long time. It doesn’t always happen — sometimes people come to us because there’s a sudden change in their lives or their business. But the earlier we can work together, the better,” she says.
Afanasiff agrees with Lawrence that the next step for working with sellers is to make sure they understand how their business will be perceived by potential buyers.
“We ask sellers to consider how the market is going to look at the business, and we try to look at how that will translate into the value buyers will pay for it. Then we work with sellers to look at what they can do ahead of time to enhance this value,” she says.
These considerations include the amount of personal goodwill in the business, what kind of management team will remain in place and how the managers will likely fare once the owner steps away.
“We also look at what the seller can do to clean up any loose ends in the business, make it prettier before it’s sold,” Afanasiff says.
‘Sometimes a family office can be a better fit’
Lawrence says that buyers can come in all shapes and sizes — private equity firms, corporations, sellers’ competitors or family offices, for example.
Afanasiff says in some cases, a family office may be a better fit as a buyer for owners.
“A family office may be less likely than a private equity firm to look at your business as a short-term strategic asset that they can merge with other similar businesses and grow substantially in a limited time period.
“There’s always a chance that this will happen anyway, but thinking through what is important to you as a seller, in advance of a process, will allow your advisor to bring the right options to the table,” she says.
The important factor for sellers is to be realistic about the sale, from the price to the final deal structure and its aftermath, Lawrence says.
“If our clients have unrealistic expectations, we’re probably not even going to accept the engagement because we’re paid to achieve a successful outcome,” he says.
The price expectations can matter, he adds. “If we think the business is worth $10 million and the business owner thinks it’s worth $15 million, we could bring them an offer for $10 or $11 million and they might not accept it. And that’s not good news for anybody.”
Deflated expectations can happen through circumstance, Lawrence notes.
‘It has worked out’
“We were selling a construction business a few years ago when interest rates were low and the likely valuation multiple on earnings for the business was about five times. Then interest rates rose dramatically and the multiple became four times, and that affected the price of the sale,” he says.
Tatto says he’s happy with the outcome of the sale.
“I’m still involved in the company a bit, but I wanted others to take the lead. I didn’t even know what a family office was before this, but it has worked out,” he says.
Please visit here to see information about our standards of journalistic excellence.