Tale of a sale

By Garth Stephanson
Photography : Corey Mihailiuk

Before selling his company, Garth Stephanson,CA, thought getting the highest possible price was the most important thing. He was so wrong

I was 58 years old when we sold our family business on March 21, 2004.When I got the first cheque for several million dollars, I didn’t know whether to jump for joy and drink champagne or bang my forehead and cry in my beer. I wanted to celebrate because my father, who had started the business in 1956, would have been so proud that his little company had grown so big. On the other hand,I had just sold the family jewel, so I felt immeasurably sad. It was so confusing: I had made a lot of money, yet I felt as if I had done something wrong.

The company — Stegg Ltd. of Belleville, Ont. — is a contract manufacturer of precision-machined components for the automotive, medical, electronics and munitions industries. It had been part of our family for 49 years. Between 1972 and 2004, it grew more than 100 times in sales and had consistently maintained its position in the top 10% of our industry in North America, reaching $15 million in sales in 2001. We experienced the enormous boom in the electronics industry in the late 1990s and shivered during the high-tech bubble burst of 2001, but we were always debt free and profitable. All 60 core team members had been at the company for many years.

But by that time, my brother, Garry, and I, who were equal partners, were getting tired and not devoting the same energy to the business that we had for the past few decades. Garry was 65 and had been at the business for more than 40 years. I constantly — and aggressively — encouraged him to sell his shares to me and retire. But Garry refused; he was comfortable with his lifestyle and income stream. The issue set the tone for continuing sibling unrest. To achieve resolution, I could have used the shotgun clause in the buy-sell agreement, but I was not prepared to trade my life savings or incur major long-term debt. For several years, we remained in a state of unresolved conflict. Although profit margins remained robust, sales were decreasing because of my lack of focus in promoting new contracts. The company could not remain in that state, and I was frozen in indecision. There were also no prospects for family succession; my two university-student daughters had not displayed any interest in entering the family business, and Garry had no children.

In 2002, our third-largest customer was sold and the 42-year-old CEO of the company, Bob Stokes, accepted a golden parachute. He had an impressive academic background as an engineer and had excelled in his previous manufacturing career. Bob was anxious for a new adventure.

In March 2003, I invited him for an early-morning walk. It turned out to be the first of many hour-long meetings that included exercise. Originally, I thought he would coach me on our long-term contracts with his previous employer. But he had a different agenda.

Bob used our meetings to learn about our company — he wanted to acquire it.He had experience; he had bought and sold several companies while serving as president at his previous employer. After several months of cultivating a thorough understanding of our successes and family dynamics, he began to inquire about our succession plans and suggested that we sell. My original reaction was that I was too young to sell.

Our company was well established, tightly managed and profitable. We had an excellent team and a solid customer base. On the other hand, I was in denial about our unresolved family conflict and its destructive effects. Other challenges included the enormous pressure for price reductions from the North American automotive industry, the long-term effect of aggressive pricing from global suppliers including China and our failure to continually upgrade equipment during the past several years. I knew that eventually we would sell and had been researching the issue over the past three years. For me, it was a question of timing.

Eventually, I disclosed the financials. Bob was pleasantly surprised and even more anxious to proceed.

He presented a letter of intent, conditional on exclusivity as a prospective buyer. Though he hadn’t considered taking on partners until after several months of morning walks, he ultimately teamed up with a sales manager and a CA who had
worked for him at his previous employer. They were silent partners until the sale closed.

Bob’s offer was reasonable and we accepted it in October 2003. Then the real negotiations started. This deal would be a win/win situation, and such opportunities are rare. I knew personally the owners and CEOs of four precision machining competitor companies that had gone bankrupt because they failed to identify the right time to sell.

The perfect choices to represent us as the sellers were Wayne Albo, CA, an independent, experienced business valuator and negotiator, and Paul Fox, a meticulous, ethical and seasoned lawyer who had done dozens of these deals. Researching, identifying and retaining these two professionals proved to be extremely important. As sole practitioners, each grew to understand our file intimately and, as the process moved closer to closing, they devoted the required time, including evenings and weekends. In addition, John Van Steinburg, our chief financial officer, did a masterful job of responding quickly and accurately to their data requests. Together, we formed an excellent team. By now, Garry was prepared to agree with my direction.

As time progressed, Bob incurred increasingly larger administrative fees from the financing group. If the deal didn’t close, that money would be lost. In addition, the letter of intent stipulated a “break fee” of several hundred thousand dollars, applicable to the buyer or vendor, so by this time we were all truly committed. Garry and I were coached to distance ourselves from negotiations; it was one of the wisest moves we made. Wayne felt this offer was excellent and advised us to accept it. We respected and trusted his opinion and to this day we have no regrets. It’s like going for a heart-bypass operation: when you are on the operating table, you don’t get to tell the doctor how to handle the scalpel. The best approach is to do research on the surgeon before the operation.

Shortly after finalizing the letter of intent, Garry and I met with our senior managers and informed them of our intentions and current status. They were absolutely stunned. Because my brother was seven years my senior, they had anticipated that eventually I would purchase his shares and he would retire. We requested their confidentiality and support in the transaction and received affirmation. During the following weeks of due diligence, daily activities continued as normal.

On Friday, March 19, 2004, Bob, Garry and I, together with our wives, met at noon at Bob’s lawyer’s office to sign the papers for the closing. With all the related documentation, final negotiating and corrections, we were there until midnight. The formal closing date was Sunday, March 21, 2004, and the funds were transferred in trust the following business day.

That Monday, Garry and I met with all members of the staff to announce the company had been sold. We introduced the three new owners and assured everyone that the transaction was friendly and we wholeheartedly supported the new shareholders. Bob’s opening comments were enthusiastic and positive; he communicated a message of stability, expressing his group’s intent to retain all existing staff and grow. During the hours that followed, many employees expressed surprise but with gracious acceptance, agreeing to assist the new owners in the days ahead. One of our long-tenured production supervisors stopped me in the plant and gave me a full-body hug.

“This must be incredibly difficult for you, Garth,” she said.

“It is,” I replied, suppressing a tear as I thanked her.

Although I had been professionally coached, my emotional reaction was completely unpredictable. I had the wrong idea of what was important. I thought the issues were obtaining the highest possible sale price, ensuring funds would be paid after the closing and securing a long-term management contract. But the real question was,
“How would I feel after the sale?”

What a strange feeling it was to return to the office that Monday morning after the marathon Friday midnight closing, knowing that Bob was the new president, controlling shareholder and grand pooh-bah. It was like having surgery to remove several internal organs. It didn’t take long before he took charge of communications and quotations with our major customers. That was my job!

Bob sent a very strong message and assumed the sole leadership role immediately. He did not consult with me on his decisions or company operations. I concluded that it made little sense to continue riding a dead horse. Our adviser, Wayne, reminded me that it was normal for the seller of a business to remain less than six months and that I should not take it personally. He was right.

At first, the experience left me filled with tremendous emotional turmoil. On one hand, I knew this had been the right time to sell. We had a perfect buyer, one who had the enthusiasm and drive to make the business succeed. He would provide continued employment for the loyal team members who had devoted their entire careers to this family organization. And the sale would guarantee financial freedom for our retirement. For almost 50 years, it had provided our family with the excitement, joy, stimulation and satisfaction of building the organization, but Garry and I did not have the vision, energy or desire to take this great company to the next level.

Ownership would not pass to our next generation. Fortunately, our respective families were supportive. They were relieved that the source of sibling disagreements was eliminated. In the end, we all admitted the sale had been the right thing to do and the timing was impeccable. On the other hand, we were giving up ownership and control of the legacy that Dad had started 49 years earlier, and I felt a profound sense of emptiness. For years, the business had consumed me; now I had been put out to pasture.

Although my morning walks with Bob stopped, our connection remained congenial. Within 12 months, four of the oldest and most senior members of the original team left the company or retired. Bob began to surround himself with a new hand-picked group imported from his previous companies. The transition happened slowly and the new team had the opportunity to assume control before the older senior management left. Although the company’s sales dipped for several months following the transaction, they rebounded and have grown. Bob’s CA partner stayed with him seven months and then returned to Toronto. His sales manager partner is still with the company.

On August 10, 2005, I had lunch with Bob and received the last payment for shares and the management termination contract. That was a very important day for me and a pleasant, friendly experience.

As the months passed, I realized the emotional trauma of the wind-down was far less than I had expected. I lost interest in production meetings, delivery schedules, budgeting, variance analysis and all the other activities that once excited me. My separation from the company happened slowly. Now I don’t miss the adrenaline of the business or the office. But one thing is certain: the stakes don’t get any higher. Owning the business was the thrill of a lifetime and I wouldn’t have missed it for the world. Three years ago, I would have emphatically denied my ability to let go. Today, on those rare occasions when I enjoy libations, they bubble in a shallow glass. Yes, it’s champagne.

Garth Stephanson is a former second-generation owner of Stegg Ltd. in Belleville, Ont. John Parikhal, a New York-based writer, consultant and speaker, assisted in the preparation of this article.”