Widow Jill Yohannes*, 58, has been managing her husband’s company since he died six years ago. Now, she’s considering retirement. Experts detail how to wind down the business, and deal with estate and tax challenges.
Bejan Yohannes died in a plane crash in 2008. His widow, Jillian, never missed him. She was planning to ask for a divorce before he died and refers to him as “the easiest 180 pounds I ever lost.”
Part of the reason she hasn’t missed him is because she barely knew him. Bejan devoted his life to a growing tubular steel importation firm in Prince Rupert, B.C.
The firm, founded in 1975, brings in aviation and construction-grade steel components (originally from Japan but expanding to goods from Chinese mills in 1996). Bejan took advantage of a recession in the lumber sector to gain low 40-year leases on storage facilities adjacent to railway lines. This strategy, coinciding with his signing early import deals with Chinese steel mills, caused the business to double between 1996 and 2000. Annual receipts are $50 million; EBITDA is $3 million.
The firm employs three senior managers, five middle managers, 10 clerical staff and 25 yard labourers. None has equity in the firm. Chief expenses beyond labour costs are storage facility leases, rail shipping agreements, and real estate taxes on the company’s headquarters (a mortgage-free, 10,000-square-foot commercial office structure with 40 parking spaces valued at $375,000).
Jill let the company’s managers run the firm during the year it took to settle her husband’s affairs, and then took over the business in 2009. She’d gotten an MBA before dropping her career plans to have children—both kids are now pursuing their own careers in Vancouver with no plans to return to Prince Rupert and work in the business.
Jill held 50% of the firm’s shares and inherited Bejan’s half when he died. Despite suggestions from an estate lawyer, Bejan refused to include the children in the share plan drawn up in 1992, citing they were minors and that such matters were “only to be looked after by adults.”
Likewise, Jill was a joint tenant on the commercial building, as well as on the couple’s primary residence (a split-level, suburban ranch house valued at $240,000). Jill has a $5-million unregistered investment portfolio acquired through self-directed trading.
Her goal these past four years has been to manage the company, rather than grow it, and orders for construction steel spurred by strong condo construction have kept the books healthy.
But Jill’s nearing 60 and realizes it’s time to draw up plans to pass the company to new owners. She’s had initial conversations with Victor, Bejan’s accountant since the company opened. His response has been simple: “Just put out a few feelers, see who bites and sell quickly.” That answer’s got her nervous.
president and founder of AIM Group Canada Ltd.
director, Wealth Planning & Trust Services, BMO Harris Private Banking
business succession advisor, TD Wealth, Wealth Advisory Services
Mark Groulx: It’s irresponsible of the accountant to be so flippant. The company has a substantial enterprise value. To not formalize a process would minimize proceeds and could also increase risks inherent in the transaction.
So rather than just put out feelers, she should start interviewing M&A advisors.
Jeff Halpern: Yes, she must commission a business valuation. This will help her understand its value relative to other competitive businesses in the industry, and what metrics buyers would look at so she can get the maximum sale price.
Then Jill must evaluate all options. There is no one single solution for succession. We’ll first meet with the family and ask if keeping the business in the family is a possibility, because a legacy is something that’s very hard to replace.
In Jill’s case, the children are not interested. If there were another shareholder or partner, we’d also look at selling to him. But again, we won’t since she’s the sole shareholder.
The third option is a management buyout. This structure is usually used if owners want to reward the loyalty of a management team by giving them the option to buy into the company.
MG: But it’s very rare you’re going to get anywhere near the cash consideration from a management buyout [that you would from an external sale]. This is because management have been employees all their lives, and don’t have a big pool of capital amongst themselves. So they’ll borrow money and pay out over time. If you just want to settle quickly and get the best price, this option might not work.
Peggy Gates-Hammond: Still, given the small number of employees in Jill’s management team, she risks losing some senior managers. So, she might take a little less money from a management buyout just to secure the senior team.
JH: If this option doesn’t work, we look at customers or suppliers, who are familiar with the business. If we still don’t have any buyers, then we go to competitors. Someone who knows your business and values it would be a logical party to deal with.
If at that point we still don’t have a buyer, we’ll consider private equity firms. Jill’s business has $50 million top line and $3 million bottom, so it’s desirable. A PE firm might be interested in buying into the company to consolidate it with similar ones it owns, or even to expand.
The last resort is to look to a third-party, unknown buyer.
Advisory boards can help
PGH: Have you ever seen a scenario where a buyer would want assets, not shares?
MG: Yes. The only reason there are so many share transactions in Canada is because of the small business capital gains exemption. Buyers prefer to buy assets because they limit their liability going forward. They’re not buying the history of the company—just the operations. So, yes, they prefer to buy assets, but usually there’s so much tax structuring in advance that, especially vendors in Canada, prefer to sell shares.
One issue she might face is that she hasn’t been growing the business—it’s been stagnant. But it’s also been steady, so that’s good. It’s a nice company and there are lots of buyers, both within the industry and outside, who’d be interested.
JH: To ensure the company remains desirable, it’s better to retain staff so it doesn’t fall apart as soon as they learn about the sale. Some business owners implement golden handcuffs. These include special compensation arrangements or a share of ownership to retain and reward staff, so they don’t leave and cause the business’s value to decline.