When the Perfect Storm hits (part 2 The Storm Clouds Gather)

In the previous post I described (in much abbreviated terms) the events leading up to our purchase of Bridgestream (not its real name).  Despite my concerns about the quality of Bridgestream in terms of its somewhat neglected infrastructure and systems, it was also my first experience of working with a venture capital partner.  With the glow of success still infusing our faces, the following morning we took control of the business and set about reviewing our new company.

Bridgestream traded from eight warehouses across the Midlands and Southern England, supplying a wide range of chemical and consumable products into two discrete industrial markets.  The business was trading profitably on narrow margins but had high overheads in terms of both premises and staff.  Our business plan included achieving major savings by consolidating down onto a single site; this would also have the advantage of operating with reduced inventory whilst improving customer service.  During the remainder of the first week, I visited most of the sites which served to confirm the urgency of the plan.

The first bombshell came with my return to the office to find an extremely concerned looking Richard in his office with the management accountant.  “We’ve been screwed” Richard announced to me.  In contravention of the terms of the sale and purchase agreement the vendor (let’s call him Mr. Offhand) had cancelled all of the previous month’s payments to creditors.  The effect of this was to deprive Bridgestream of the major portion of the working capital we had relied upon.  I agreed with Richard that an overhaul of the accounting systems was vital if we were to have accurate information.

The situation was compounded when we also discovered a few days later that in settling an intercompany debt pre-completion between Bridgestream and its sister company (remaining with Offhand) a large over-payment had been made.  The net effect was now a hole in our working capital of well over half a million Pounds, a situation that moved us from serious to virtually crippled. Richard quickly spoke to Offhand who made soothing noises and promised to look into the situation.  We hastily reran our cashflow projections and calculated with the benefit of the deferred consideration, changes to our payment terms and some savings we might survive; but we needed that cash.  The next call was to our lawyers.

Despite many calls to Offhand, no payment was forthcoming, so on our lawyer’s advice, we instituted proceedings against him for breach of contract. Offhand’s reaction was to issue a counterclaim for repayment of the deferred consideration.  As the months dragged on I attempted to engage Offhand in the Alternative Dispute Resolution (ADR) process but despite agreeing he never showed up for a meeting.  One of our managers still in contact with Offhand reported that he had no intention of paying as he believed we couldn’t afford the legal costs to win.  The legal processes rolled on and our costs duly rose.

Meanwhile, the cash situation was not improving.  We were surviving but barely and towards the end of that first year, the directors all agreed to reduced salaries.  Richard had agreed to replace the management accountant as he was, in Richard’s opinion, simply not up to the job.  The months dragged on but no change took place, Richard always having one excuse after another to delay making a change.  It also became apparent that our invoice financing company were reducing their advances to us, having the effect of stressing our finances still further.  A meeting with their management revealed their concerns over the credit worthiness of many of our customers.  Richard promised a major drive to improve debt collection.

Richard had started giving me growing cause for concern over this period.  He was increasingly absent from the office, ostensibly improving sales but instead he frequently met with one ‘snake oil salesman’ after another and came back full of his latest ideas for additional (and wholly inappropriate) new product lines.   The monthly accounts were increasingly late for our board meetings and appeared to be showing profits whilst we were bleeding cash.  After another board meeting when we were again without full accounts, I called off the meeting and met alone with Richard.  What followed were hopefully the most difficult couple of hours of his life.  I covered all of his shortcomings, his continued failings to take corrective action despite commitments, inappropriate sense of priorities and his duties as a director and required a programme of specific actions over the next period (through to our first year end).

Over the next couple of months we set about the site consolidation process.  We finally found suitable premises, close to the centre of the country and the motorway network and after careful planning on Tim’s part we made the move over one hectic, weekend.  The long awaited reduction in stock levels finally started to feed through.

Yet another turn of the screw came when the financing company rewarded our stock reduction programme with a reduction in advance.  The promised sales improvement failed to materialise and combined with our reduction in stock financing we were seeing no improvement in our cashflow. Richard was pleading the need to concentrate on producing our year end accounts (which we were under pressure to produce) and had still not replaced the management accountant (saying now that he had great loyalty).  I was forced to give him additional time to achieve the commitments he had made to me.  Richard shortly afterwards produced management accounts showing a breakeven position at the year end and promised that the cash situation was improving and that now the move was complete we would see real benefits.

Some weeks later my mobile rang with a devastating call from our major supplier.  I learnt in a very difficult call that Richard had reneged on a previously agreed payment schedule and was now avoiding calls.  He informed me that all confidence in Richard was exhausted.  I promised immediate attention to the issue and asked, on my personal surety, for additional time to resolve matters.  The following day I was due to meet with Richard and Tim at our accountants’ office for the audit meeting, so I decided to delay any conversation until we could meet face to face.

The information from our audit partner was worse than I could have imagined.  The year-end breakeven Richard had reported (critical to the continued support of our financing company) was in fact a large loss.  Furthermore, we were informed that the firm had never seen an accounting system in such a mess.  Richard bumbled on making a series of ludicrous excuses whilst I sat and tried to configure a plan.  The first step had to be to remove Richard; not only was he past the point at which he could recover any credibility, it was clear that he was utterly incompetent.  I made suitable excuses and left to start moving things forward.

 My first action was to meet with our VC partner to bring him up to speed and gain his agreement to the action I was proposing.  I then had a meeting with our lawyers to review the terms of Richard’s contract.  They agreed that the situation constituted a serious enough breech of his duties to warrant dismissal without compensation.  That left the issue of Richard’s equity which was literally under water and without value.  Under the terms of his contract if he left the company he was required to sell the equity back to the company at an agreed valuation. In an act of generosity I set a valuation of a nominal sum.  I called Richard and set up an extraordinary board meeting for a couple of day’s time.

What followed was the hardest task I have ever had to undertake in business.  It had fallen to me to fire more than a few people in my time but to take away someone’s dreams and their life’s savings at the same time was not something to relish.  In the event a usually verbose Richard was stunned into silence save for a few monosyllabic replies.  I escorted him whilst he cleared his office and saw him off the premises.  Later that night he returned blind drunk and hurled two pallets through the front office windows.  The exercise of power can be a sobering experience.

Could we save the business?  In part three I look at the aftermath of Richard’s departure and how the gathering storm grew in intensity to reach perfect proportions.

 

 Image courtesy of viralblog.com

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2 responses to “When the Perfect Storm hits (part 2 The Storm Clouds Gather)

  1. How did you get hooked up with Richard as a partner in the first place? Was he a friend?

    I’ve found, in life, there are two ways you really get to know someone well–by living with them, and by being in business (or working) with them.

  2. God forbid I had to live with the man! I was introduced to Richard via the VC as my contacts there thought he was suitable as a buy-in candidate but they wanted someone they knew as chairman to invest alongside them. Initially the brief was to meet Richard and assess him and the business. This was probably the worst misjudgement of character I have ever made but he was a smooth and persuasive individual whose fatal flaws took time to emerge.

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