With Richard gone I appointed Tim as MD, we started the hunt for a finance director and commenced the process of forecasting the next twelve months ahead. We quickly discovered that, such was the mess, it was not possible to establish the true working capital position. Our auditors hired us the services of an experienced accountant who quickly set about the process of investigating the current state of the company’s books. The management accounts were not worth the paper they had been printed on and, worse, the VAT had not been reconciled for months. Whatever vestiges of empathy I had had for Richard quickly evaporated.
With a twelve month plan completed, Tim and I presented this to our finance company and visited every one of our key suppliers to explain the current situation and to present our plans. Luckily, we gained the full support of everyone. Tim proceeded to do a remarkable job as the new MD, working tirelessly to rally the whole team, whilst I started the process of seeking a new finance director. With the aid of our VC, we quickly met and appointed a very experienced FD who quickly set about bringing the company’s books up to the required standard. With the correct information guiding us, and the whole team working effectively, sales and margins slowly started to improve.
By mid year (our second) we were trading profitably but cash remained as tight as ever. Further close examination revealed that our finance company were slowly but surely reeling in their loan by reducing their advances against our invoices. It was galling in an extreme to realise that, had we not had the actions of the vendor and his illicit cash strip, we would have been in a healthy cash position with no liquidity concerns. However, with Offhand (the vendor) again doing a disappearing act at my latest attempt to arrange a dispute resolution meeting, it was clear that we were running out of time before we had to go to court. Although we were sure of the odds of winning on our main claim (the cash strip), there was unfortunately (due to the poor state of the books before our purchase) a degree of uncertainty over the smaller claim. With the prospect of enormous legal bills even if we won the main claim, it was clear that drastic action was needed. My first foray into business ownership looked like it could hit the rocks.
With the business trading in two entirely separate markets, with two different product ranges, it was apparent that, potentially, we could package one half of the business and sell this to a competitor. One of the product ranges had lower margins and poorer quality debtors but had potentially a higher strategic value to competition. With a range of cautious estimates for a sale price, it became clear that the rump business, operating with lower overheads, could prosper even without the reducing invoice discounting facility.
I initiated a series of discrete discussions with our competition for the more saleable business. My approach was based on the premise that having recently acquired Riverbridge, I was conducting a exploratory review to ascertain if we should either expand the business by acquisition of a suitable competitor (were they interested in selling) or to dispose of one business to concentrate on the other (were they interested in acquisition). Two such meetings sparked interest that I progressed leading me to believe that we could achieve a price at the upper end of our estimates. Nevertheless, whilst we were now trading profitably, we were far from being out of the woods in terms of liquidity and whilst in this situation we lacked the cash to pursue the legal action. I drove the long way back home that week convinced we could make the plan work.
Given the somewhat vague legal definition of insolvency, I wanted to be sure that we were on safe ground selling off company assets and sought specialist advice from one of the big four accountancy firms. It transpired that to be certain that we were seen to be acting in the best interests of all the creditors, we needed to advise them of our plans and gain their agreement. As I was returning from the meeting I received a call from one of the two interested parties advising me that they were withdrawing. This robbed me of the opportunity to have two parties bidding against each other but all you need is one willing purchaser; so, press on. When I got back to the office I found that sales in the previous month had failed to reach our projection. Immediately, the finance company reduced advances against our invoices still further.
Good news came at last in the form of an encouraging offer for the part of the business we had put up for sale. We only now needed to gain the agreement of our creditors to a new overall plan, realise the sale at the agreed sum and we were home and dry. We would be able to pay off all overdue creditors and finance court proceedings against Offhand. We carefully revised our rolling twelve month business plan and Tim & I started the arduous task of again travelling the country to meet our creditors. The full story we presented included a fall back position (if the sale failed or we did not receive the full backing of all creditors) of having to place the business into administration. In the event, we achieved 100% acceptance of our plan but to no avail.
The hammer blow came several days later, when I received a call from the CEO of the competitor that had made the offer; he had heard of the precarious state of the overall business and was withdrawing his offer. It subsequently transpired that the credit control manager of our largest supplier (who had pledged full support to me) had revealed our situation to our competitor. We discussed the situation as a board but there was no way out; with the working capital financing now almost depleted (and soon to disappear completely) and no way of raising further finance to continue trading and fight our legal case we had run out of road. The same day I appointed the firm I had met as administrators and arranged to meet them at the office the following morning.
Over the next 24 hours I was relieved of my duties as an employee and director. Tim was kept on for a few weeks more whilst the administrators tried to sell the business as a going concern. The part of the business we had originally received a healthy offer for went as an asset sale for a fraction of its worth immediately prior to the administration. I lost a great deal of money and the creditors never received a penny. Our wonderful administrators then managed to string the process out for ten whole years and took everything they raised in fees.
What had I learnt from all this?
Without a shadow of a doubt, we were robbed by our vendor. When making an acquisition you can have all the guarantees and indemnities you and your lawyers can negotiate but you still take a hell of a risk. Fighting legal claims is a very expensive process. The only satisfaction I got was hearing some years later that Offhand’s mistress threw him over and his wife divorced him, winning most of his ill-gotten gains.
The references that had been obtained for Richard had been a fairy tale; I discovered that he had run a prior business into the ground in similar fashion. Over the years I’ve found that references are frequently a waste of time, or at least, it’s not what people say that counts it’s the bits they leave out.
If our experience of appointing one of the big four firms is typical, the administration process does not seem to work in favour of the creditors. Without exaggerating, I’d say we (and our creditors) were robbed on the way out as well as on the way in to this business.
Tim went on to form his own business and last heard was making a very good job of it. Of all the people I’ve worked with, Tim ranks amongst the very best. All of the team who worked with us through those trying months did their best; I only wish for their sakes we could have pulled it off.
Had I made horrendous mistakes? I could blame myself but apart from believing in Richard and supporting the acquisition in the first place, I think I made the appropriate decisions in a timely fashion.
Yes, if you throw enough hot c**p at a blanket some of it will stick. Shortly after acquiring Bridgestream my favourite VC and I did two more deals; one soon looked like it was also heading to the graveyard when we uncovered a horrendous loss and the other quickly threw up a very bad case of fraud (and years of legal fees). These are tales for another day but I did learn to multitask as both of these situations occurred at the same time as Bridgestream!
Bye for now!
Image courtesy of seasonsofthemoon.com