How to implement a successful succession plan for small firms

By Alexander R. Keen, the Altech Group, and Brian Bobbie, Char Technologies Ltd.

The Canadian environmental consulting market is alive with large engineering firms with over 5,000 staff that seem to keep getting larger (i.e., GHD, Stantec, Wood, Golder, etc.) and numerous smaller engineering and science firms, both new and established.

By nature, the consulting engineering and science business has few barriers to entry. New firms often start up when highly experienced senior staff leave larger firms, then incorporate and grow organically themselves. Often, their firm too is acquired by a larger one. The cycle repeats itself constantly.

For small engineering business owners, planning for corporate succession is a vital but often overlooked process. This is because we get busy taking on challenging projects and are constantly adding value for clients as we grow our consulting practices, add staff, add services lines, and even expand geographically.

Every business owner knows at some point he/she will need an exit strategy, and that folding up tent on one’s successful life’s work is never the preferred option. The recent acquisition of a small firm, the Altech Group, by a dynamic publicly-traded corporation, Char Technologies Ltd., may provide some insight for other business owners planning to embark on a similar path of business succession.

Succession options

There are a myriad of succession options for small firms. These include handing down to a family member or a fellow senior consultant, assisting with an employee-led buyout, retiring and holding ownership, or merging with a similar or complementary firm. When owners start firms, they obviously don’t plan for the exit. But it’s amazing how quickly time passes, so starting early at looking at your options is better than later. Only once you identify a preferred option, can you position your firm effectively for that option.

Finding a suitor

Altech has been in business since 1986, and is a trusted provider of environmental compliance and technology applications engineering for industry. Founders, Alex and Nonie Keen, knew that this specific market was underserved, and that staff was valued by them and clients. So, business continuance was the obvious choice. In the absence of an employee buyout, they set about positioning the company optimally for a merge by finding a like-minded firm.

There are plenty of sage mergers and acquisition (M&A) books with advice on financial positioning of your firm. They work. How we operate our small businesses financially long-term may not match what suitors are looking for in the immediate term. One of the keys is knowing your own strengths and weaknesses—not any easy task for owners and senior managers looking from within.

Altech worked on strengthening its strengths and weakening its weaknesses, and honing its key performance indicators over the course of a few years. These included balance sheets, earnings, amounts due to owners, credit rating, repeat client base, etc.

During this time, clients continued to be well served and staff and their families were happy as well.

Finding an M&A partner is actually not a difficult task. Finding the right one, though, is the challenge. In Altech’s case, cultural fit for staff and the preservation of the business model were two key factors identified. Price came a distant third.

CHAR comes to the table

One’s network of contacts is extensive when in business for over 30 years. Mining your contacts within venture capital firms, with industry associations, and even with acquaintances, are all good starting places. Some larger engineering firms are known to be looking for acquisitions and are often receptive to answering the phone. Note that the “who-called-whom-first” chronology can often impact discussions going forward.

Altech had several M&A discussions with other firms over the years, with activity increasing recently as the firm became more active in finding a fit. Depending on the level of advancement of discussions, you should be prepared to invest significant time for those discussions and the needed data sharing. Financials should only be shared, of course, with a good non-disclosure agreement in place.

The publicly-traded Char Technologies came to Altech because of the strong technology inclination of its custom solutions division (Altech Technology Systems Inc., “ATS”), coupled with the solid earnings and capabilities of the affiliated engineering consulting firm (Altech Environmental Consulting Ltd.). Char is rapidly expanding its speciality technology and product offerings and was outsourcing the needed engineering capability.

The M&A fit offered by the experience and patents within ATS, together with obtaining the in-house environmental engineering capability of Altech Consulting, made perfect sense. Few acquisition targets had the same valuable mix and were ready for succession.

Client and staff transitions

A cultural fit for the staff was one of the key criteria for Altech of finding the right corporate buyer. The intellectual property and success of any small engineering firm rests in its people. Many small firms have been acquired by large ones, where staff members become cogs of a larger wheel. In fact, many of Altech’s valued staff come from larger firms, but prefer the feeling of family and of having input into their direction and their workplace. CHAR’s entrepreneurial culture is a strong fit for Altech’s staff members, and vice versa.

From CHAR’s perspective, continuance of the business as a going concern and of maintaining the relationships forged with clients, were key success factors for the merge.

There is often a concern that retiring principals will cause the business value to deflate. On the other hand, if a small firm can demonstrate the “flywheel” effect—that all staff members are the main source of those trusted client relationships and ongoing sales—then shareholder confidence and long-term corporate value remains high. CHAR noted the flywheel at Altech and assisted management in providing a retention incentive to staff, to help ensure that transitional confidence.

Closing the deal

After sharing a non-disclosure agreement and assessing financial, client and services information, CHAR provided its letter of interest to Altech for an M&A. Then, after the deeper, bilateral due diligence process confirmed the cultural, market, services and financial fits, a purchase and sale agreement was reviewed and executed. The entire process happened between July and December of 2017, with the closing date of January 1, 2018—a typical timeframe for an acquisition of this type.

New horizons and CHAR

The systems transition that is typically associated with an M&A (i.e., accounting, project management, IT infrastructure, office relocations, staff allocations, etc.) is nearly complete. All staff has made the transition to the new ladder, and look forward to the opportunities provided.

The CHAR group of companies (www.chartechnologies.com) is now expanding its operations in London and Hamilton, Ontario, and in Latin America. A new carbon product, SulfaChar—used for desulphurization and odour removal and re-use as a fertilizer—is now in production using proprietary technology

The horizons for CHAR and Altech are now wide and bright. Management, clients, shareholders and staff are pleased, which in turn allows the principals to either choose to retire knowing their succession plan was successful, or to help add value and expand the horizons. All small engineering consulting firm owners should take this leap.

Alexander R. Keen is a founder of the Altech Group. Brian Bobbie is President of Altech Environmental Consulting Ltd. and CAO of Char Technologies Ltd. This article appears in ES&E Magazine’s December 2018 issue.