REPUTATIONS "SUCCEEDING IN SUCCESSION"

10 AUGUST 2010

The following article appeared in Business in Vancouver the week of August 3, 2010. Subscribers can download the issue from www.biv.com. You can also download the article in PDF format here.

CASE STUDY: SUCCEEDING IN SUCCESSION


A close look at legal issues around transition planning could unearth helpful strategies and avoid headaches


By Curt Cherewayko

When Linda Bilben and Michael Davis acquired Reputations Corp. in June, it was the culmination of a three-year succession process.

As employees of the 16-year-old Reputations for nearly a decade, and as the two most senior executives below the public relations firm’s founder, Wayne Hartrick, the business partners had one particular issue to address in the deal: how do you assess the price tag of a business in which you have played an integral role in building value?

Or as Davis put it: “How do you put a value on yourself?”

With that in mind, the pair couldn’t wrap their heads around the concept of a straightforward cash-for-equity deal.

That structure would also have required a significant up-front investment from them.

“I think its true for any consulting firm that it’s really difficult to find that balance between the old owner getting his or her equity from something they’ve built for years and years and the new people being able to buy-in in a way that, first of all, they’re financially able to,” said Davis.

Hartrick, with guidance from his lawyer and accountant, proposed that the pair pay him and minority shareholders a long-term royalty on gross revenue in exchange for the firm.

The pair formed a new, numbered company that does business as Reputations.

That company pays royalties to Reputations in exchange for its client list, brand, employees and intellectual property.

“Cash for equity would’ve been a gradual [process] and would have meant that we couldn’t have crystallized this kind of thing in June as we did,” said Hartrick.

Hartrick, to his credit, had a business succession plan loosely in place when he founded the firm.

According to Don Sihota, a partner with Clark Wilson LLP who specializes in private business transactions, many business owners unfortunately do not have succession plans in place.

His advice: plan early and plan often.

Without proper planning, business owners likely won’t get the best sale price they can when they inevitably extricate themselves from their business.

“There is going to have to be an exit at some point, so if you build your business to that end – whether it’s five or 20 years from now – you’re planning for creating as much value as possible,” said Sihota.

And as Sihota points out, 18% of business owners in B.C. in 2000 were over the age of 55.

In 2006, 26% of business owners were over the age of 55.

That boomer-fuelled trend will likely continue and result in more business successions in B.C. in the coming years.

He said that in addition to business fundamentals such as a solid management team and diversified client base, potential buyers assess how tied a business’ identity is to its owner.

As Sihota notes, selling a business isn’t just about putting a price tag on it; potential buyers want assurance that the value of the business will remain intact after the sale.

That can also include ensuring employees are under non-compete or non-solicitation agreements with a potential new owner.

Such agreements prevent employees from taking advantage of the turmoil surrounding a business’ sale to hang their own shingle in the same industry and to snap up clients from the business.

“These things don’t happen overnight; they have to be implemented in the process of building a business,” said Sihota. “The problem is that many times, business owners do the exact opposite of what they should do.”

While many consultancies, in particular, are branded using their owner’s namesake, Hartrick made a point of not including his name in the brand. In doing so, Reputations has retained its value post-sale, as the firm is not associated with any one particular owner.

And also as part of the succession plan, Bilben and Davis took on more responsibility for the company over the last three years and essentially became the face of Reputations by the time they acquired it. Doing so helped reassure clients that Reputations’ service will remain the same despite its having exchanged hands.

Hartrick has also remained a senior consultant with Reputations, which provides further reassurance to clients.

“We’ve been able to maintain a very positive relationship with Wayne,” said Bilben. “And also, as we’re going through the small growing pains as a new company, we have him as a mentor.”