JENNY LEE
The Vancouver Sun
Harry Watson hadn’t planned on owning a big company.
“I never wanted any more than six employees. That was my goal,” said Watson, 71, who started Metro Testing Laboratories in 1987 and found a niche providing quick and convenient concrete testing for the construction industry.
“We were cost effective and there was no bureaucracy. We came out to do the test and gave them the results the next day,” said Watson, who added that his competitors were mostly larger firms that took longer, required more paperwork and offered tests only as part of a larger package of professional engineering services.
“I kind of grew like mushrooms,” Watson said. “We started in Vancouver, then we started to get phone calls for Langley and Abbotsford. One of our technicians was living out there. (We said) ‘Why don’t we just open up a small lab out there and you can run it?’ ”
The same thing happened in Whistler.
Each time Watson expanded, he started a new company and gave its manager a 10 to 20 per cent share for a small investment.
“I just thought if they are going to manage the business, they should have a stake in the business,” Watson said. Then those managers began making shareholders of their key employees.
By 2014, Metro Testing had been rebranded as Canadian Construction Materials Engineering & Testing, comprising 14 incorporated companies with 64 shareholders and 275 employees. And that’s when Watson realized he had a problem.
“It became a bit unmanageable,” Watson said. “The model was good at the start.”
Just as Watson started reorganizing to reduce risk to individual owners, someone offered to buy CCMET. That deal fell through, but Watson kept going both with reorganization and selling. His accountant Mike McIsaac, a partner with Renaissance Group chartered professional accountants, handled both jobs.
“It was a big process, and the amount of paperwork, it scared me,” Watson said. “I saw this 14foot table and there was inches of paper from one end to the other. Piles and piles and piles. ‘I have to sign all these?’ (McIsaac) said yes.”
Multiple shareholders are common in professional services firms such as engineering and accounting, and entertainment groups such as pubs and nightclubs — “anything where you need to have
somebody’s boots on the ground,” McIsaac said.
But the structure can create issues around confidentiality, gaining consensus and fairly allocating sale proceeds to each shareholder.
Many professional services firms like CCMET also set up new entities as they expand, but this can mean higher accounting and legal fees and challenges when selling.
“Every potential purchaser we talked to, their requirement was one company that owned all the locations,” McIsaac said. “Executing a restructure of that magnitude is not an easy feat. It involves many months of co-ordinating, planning, legal work.”
An employee-ownership culture can be achieved through one holding company with multiple divisions, an employee stock ownership plan, phantom shares (where employees are compensated as though they were shareholders) or profit-share plans, said Axel Christiansen, vice-president of mergers and acquisitions at Renaissance Group.
But a change to a unified corporate structure can create difficult feelings.
“You may go from owning 10 per cent to a fractional share position, and although your dollar value should be the same in theory, you might not feel the same way about it,” McIsaac said.
Gaining consensus to sell among many shareholders can be difficult. One way to ensure a sale isn’t sidetracked by a few shareholders is a plan of arrangement, drawn up via a court process, in which a vote of 75 per cent approval would be enough to go ahead, McIsaac said. Watson chose not to do this. “I think my 64 people will all say yes. I took that risk,” Watson said. “If it hadn’t worked, that would have delayed the whole transaction by at least a year … (but) I didn’t like the other way.”
Professional services firms are also often project-based so their working capital requirements (current assets minus current liabilities) can vary significantly, leading them to hold more cash as a buffer. This can lead to tax consequences such as not qualifying for capital gains deductions due to excess non-business assets, and difficulty negotiating working capital when selling the company.
“Working capital is invariably one of the most heated negotiation points in a sale,” Christiansen said.
If the company hasn’t been managing its working capital efficiently, the average net working capital is higher than it needs to be and the purchaser will push to have those excess funds included as part of the sale.
“My company was very complicated for someone to buy,” Watson said. “It’s one of the reasons the first offer fell through.”
Even though the entire presale process cost him about $250,000, he has no regrets. “If I had to do it all over again, I’d do it the same way.”
He believes his managers, who nicknamed the parent company “Mama Metro,” felt “more ownership because it was their own company rather than a big company.”
Watson ultimately sold 70 per cent of CCMET to Equicapita, a Calgary private equity firm, earlier this year at 80 per cent above the early target price. CCMET is now one of the largest material testing firms in B.C., and Watson is looking to expand eastward.
Fifteen original shareholders now own 30 per cent of CCMET and still work at the company. “But now we have some money to put in the bank. If something happens to us and our families, we’ve all got our security blanket,” Watson said.
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