Monthly Archives: August 2012

The Business of Life Chapter 29 – and then three come along at once

The New Year of 1997 brought surprises that, for once, were something to celebrate.  Shortly after the world started work once more after the long Christmas break, I had one of my regular review meetings with Phil at KPMG’s offices in Leeds.  “We’ve had a positive response from the last batch of letters I sent out,” Phil informed me, “Metal Spinners up in Newcastle are prepared to meet you.  However, when I spoke with them they told me how much they wanted for the business and it’s more than a bit rich.”  I remembered the business well from the last batch we had discussed and when Phil let on the amount they wanted, I groaned inwardly.The business of life chapter 29

There are many ways of valuing a business but one of the simplest is that of a multiple of sustainable earnings.  Somewhere between 6 and 7 times profit before interest, tax, depreciation and amortisation would be a reasonable average for a privately owned manufacturing or engineering business at the time.  The problem was that the figure they had quoted Phil was way above that.  “Sod it,” I responded, “We haven’t had a nibble for a while and the pipeline is a bit depleted, I’ll go and see them.”  We fixed a date for a week or so later and Phil volunteered the services of Crevan, one of his managers, to accompany me.  Perhaps there was some reason not evident in the published accounts as to why they had such an apparently inflated view of the value of their business.  Time would tell.

Back in my office the phone rang a short time later and I had Mark T from 3i on the line.  “We’ve just concluded a management buy out (MBO) of an engineering business in Sheffield and we need a Chairman on the board.  No guarantees that they’ll pick you as we have provided them with the names of a few suitable candidates, but are you interested in having a talk with them?”  A few days later saw me seeking out the address on a small industrial estate on the south side of Sheffield.  The business was housed in old premises and specialised in the production of small batches of bespoke tungsten carbide components and was very profitable.  The business had been bought out by its management (the engineering director and finance director) who now shared the role of MD.  I was given a tour of the facilities and we then discussed the business plan they had used to support their bid.  The meeting seemed to go well and they said they’d let me know when the other candidates had been seen.

The next week Crevan and I made the journey up to Newcastle and met with Clifford the MD and Mike the finance director of Metal Spinners (Newcastle).  The business had been founded in 1953 by Clifford’s father and proved to be spread across numerous sites in Newcastle, Washington, Manchester and Birmingham.  The premises that we saw that first visit were old (like so many UK engineering firms I had seen over the last year or so) but there was something about them that gave off good vibes to me.  I liked the fact that their main process (metal spinning) was very much a niche one and that they had both a major blue chip industrial company as their main customer plus over a thousand others.  The incredibly welcome news was that the business was in fact a group of eight separate companies that were non-consolidated.  The combined turnover and profitability of the group was far higher than I had realised (having only seen one company’s accounts) and put the asking price right back in the realms of the feasible.

The other great news was that the business was not on the market and wouldn’t be if we could deliver a deal on their asking price.  Crevan and I came away with a complete set of books for the total company and pages of notes that we had made during our discussions.  Driving back to Yorkshire we summed up the opportunity; the shareholders seemed willing (although there was an absent shareholder and a family trust), the business was in a highly specialised niche, it was profitable, it had very limited exports and seemed to offer once more the opportunity to acquire smaller competitors and consolidate onto a smaller number of sites.  This was the best opportunity I had seen in a year and a half and it was exactly the type of company I had set out to buy.  Crevan and I agreed a split of the workload needed to assess the business and I headed back to my office to telephone Mark with a briefing on the day’s events.

The following day I received a call from one of the joint MDs in Sheffield.  They had completed their interviewing and wanted to appoint me as chairman if we could agree terms.  A few days later I formally became the non-executive chairman of Hallamshire Hardmetal Products with a requirement to chair monthly board meetings and be on hand to guide strategy, oversee the delivery of the business plan and provide whatever assistance they might require.  The company was run on a relaxed basis but I was pleased that their accounting systems were rigorous and Trevor H and Trevor S (the joint MDs) were easy enough to work with but had an all consuming passion in keeping things simple.  There isn’t a great story to tell but over the next ten years or so we formed a great working relationship, evaluated several businesses, bought a smaller competitor and then staged a further buy out from 3i.  The business never failed to make profits in all these years and was finally sold to a buy-in candidate in 2008.  Sadly, Trevor H never lived to realise the fruits of his labours, dying a short time prior to the sale.

Meanwhile, I was still in the midst of evaluating the Metal Spinners business when Mark T came on the phone once more.  “We have a buy-in deal we’re trying to complete but have a problem with their choice of chairman and are not sure about the business.  Would you like to have a look at the business for us and let us know your views?  If it looks good, we’d like you as investing chairman to lead the team.” There’s a long and tumultuous tale to tell here but suffice for the moment to record that I did approve and complete the deal and became investing chairman of Rothmere Ltd in the first half of 1997.

Over this hectic period I was burning the midnight oil with Mark and KPMG to pull together a heads of agreement with the owners of Metal Spinners.  Earlier that year we had managed to get Clifford and Mike down into the 3i offices in Leeds to thrash out an outline deal.  The sum that they had put on the table had transpired to still be far too expensive once Mark and I had put together a full 5 year projection.  I had discovered Clifford to be volatile and I was concerned as to how the meeting would go.  After an hour or so we had reached what seemed to be a significant hurdle and were well over seven figures apart.  We were also surprised to learn that they had appointed neither lawyers nor accountants to advise them; proving to be both advantageous in the short term and a near disaster later on.  Paul called a breakout and very quickly came up with a plan.

That morning we had received the first set of up to date management accounts and learnt that the business was rapidly building a substantial pile of surplus cash.  Going back into the meeting Paul spelt out (in the absence of any advice of their own) the net proceeds they were likely to walk away with after tax if we delivered the price they were asking.  This wasn’t enough to keep Clifford and Mike happy.  He then asked them what they thought they would be happy receiving after tax.  Having established this figure, Paul then laid out a formula whereby they took a combination of pre-sale dividend of the cash they had build up and took a substantial slice of the proceeds in the form of loan notes spread over the two years following a sale.

This formula of deferred consideration would give us a hefty contribution to our working capital requirements and lessened the upfront investment.  These loan notes together with the pre-sale dividend (their own money) produced a substantially lower overall tax bill that just brought the net proceeds up to the level Clifford and Mike had agreed they wanted to achieve.  In effect they were financing part of the transaction to achieve a lower tax bill.  They agreed and by lunchtime we had a signed copy of heads of agreement on this basis.  As part of the agreement they were giving us a period of exclusivity to enable us to complete the deal during which they would neither approach another prospective purchaser nor would they enter into negotiations with any other party.  The deal was on and it seemed achievable but a vast amount of work needed to be done in terms of due diligence.  A phrase was then uttered by Paul that was to come back to me time and again over the years in every transaction I was a part of,  “The devil’s in the detail.” he cautioned.

A couple of weeks later Mark T called me to ask what my time commitments were like.  By this stage I was chairman of one 3i investment and had recently completed my first MBI as investing chairman of another.  In addition, over the last couple of years I had continued my work with Jerrard Bros Plc and had been appointed chairman the previous year.  I responded that I still had some spare time and asked what he had in mind.  By this time it had become clear to me that, even if I couldn’t pull off the one big acquisition I had set my sights on, I could achieve a very nice portfolio of non-executive roles combined with equity participation.  We agreed to meet the following day.

Sat once more in the 3i offices (where I was beginning to feel at home) I listened to Mark T describe the problem he had.  They had backed the growth plans of a small technology products distributor that had grown extremely rapidly (by around 35% each year) and  had expanded into the USA and Germany.  Profits had been sacrificed for growth but the latest year’s results had produced an unexpected loss of £1m (largely as a result of the US investment).  The shareholders equity was now ‘below water’ and the bank was making ominous noises.  Would I go and meet the two director shareholders and, if they agreed, join the board as a non-executive?  I was subsequently appointed to the board and another rollercoaster ride was about to start.

Over and above my due diligence work on Metal Spinners and maintaining the research and analysis to keep the MBI target pipeline full, I was now working for various periods each month in businesses based in Croydon, Hull, Heathrow and Sheffield with various additional activities in London, Bristol & Birmingham.  I stopped all efforts to win new consulting clients and knew that something would have to give in these activities if I managed to pull off the major acquisition I had been seeking.  I was burning the candle at both ends and in the middle but was enjoying life more than I had for many years.  And any concern about money had disappeared over the previous few months as my portfolio of activities had grown.

My new life as a non-executive & chairman seemed to be the role my career had been building towards.  I was responsible to 3i to ensure that their investments in the companies I had joined produced the results they had planned.  However, this role was legally (and in practice) overridden by my responsibility to all of the shareholders (and in my mind to all of the stakeholders) of these businesses.  My broad experience had provided me with an ability to see these businesses in a wider context than their other directors (whose deep functional & specialist experience certainly exceeded mine).  Freed of the responsibility to manage a day to day role I was able to concentrate on direction, strategy & people (including customers).  These key aspects could only be achieved as a result of the closest working relationships with my fellow directors and their teams.  I was finding my business life to be immensely fulfilling.  Unfortunately, I was also going to find out that it would shortly become vastly more challenging than I could ever have imagined.

Meanwhile, alongside my work and responsibilities with these four companies, I was ploughing every once of energy and expertise I could muster into completing the acquisition of the Metal Spinners group of companies.  I was increasingly confident that I could pull this off but completely unaware of the scale and scope of the problems that were about to emerge in three of the other companies.

Image courtesy of en.wikipedia.org

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The Business of Life Chapter 28 – when it’s so much harder than you imagined

Unlike many MBI candidates I had met or heard of who merely waited for a referral from an accountant, lawyer or VC (usually whilst they continued to job hunt) my strategy was concentrated on researching the market to find the hidden opportunities,  those businesses that had yet to be put up for sale that I could convince to sell to me.  So, I was pleased and surprised when I received a referral from KPMG to a business that they knew was being put up for sale.  My months of hard work were beginning to pay off  and it meant that I was being taken seriously as a buy-in candidate.Staying-the-Course (The Business of LIfe)

The company concerned, a paper processor, was housed in an old Yorkshire mill (yet another one) and, as the name suggested, it processed large rolls of paper into toilet rolls, kitchen paper, napkins and the like.  It also had a small trade recycling old clothing into cleaning cloths for the engineering businesses that had once been plentiful in the area (destined to become the legendary oily rags). I can’t now recall the name of the paper processing side but the rags were sold under the trade name of Hyman Wipes, something that has stayed in my memory.  Can’t think why.

My heart sank as I toured the old premises filled with machinery and employees that looked for all the world as if they were from the same vintage.  The finances were not disastrous but the business would struggle to stay healthy and there was no way that it would be able to repay the debt I would have to take on to buy the business, let alone any investment in new equipment.  However, if I could buy not just this business but one or more of its competitors then there would be considerable scope for rationalisation into a small group of businesses in the same sector (with increased profits flowing in due course).

After writing up the notes of my visit and sending these off to Phil, I set about researching competitors that would be likely targets.  I soon had a meeting organised with the owner of another paper processor that seemed a likely target.  He was wary and would not agree to my visiting his premises but instead met me at a nearby hotel.  We played cat and mouse for an hour or so but it became clear that there was not going to be a meeting of minds.  Back in my office I spent more time analysing the sector.  It was clear that the smaller companies in the paper processing industry were under attack from far larger players who would be completely out of my league as acquisition targets being mostly owned in turn by yet larger companies.  I met with Phil, took him through my findings and we agreed this was an area best left alone.

Shortly after I got a call from a partner at Grant Thornton inviting me to an event they were staging at their offices in Northampton.  The evening centred around presentations from a number of experienced representatives from corporate finance lawyers and banks.  This included some useful additional information.  But the real value of the evening was the opportunity to meet other MBI ‘wannabees’.  Many private businesses that came onto the market were retirement sales and it was not uncommon for two or more shareholding directors to be attempting to exit at the same time.  It was impossible at that stage to guess all of the possible functional skills I was going to need in a future business but it was almost certainly going to include a finance director.  So, I was delighted to meet Mark over a coffee during the mid evening break.

Mark was employed as a finance director and wished to become part of a successful MBI team.  He quickly impressed me both with his commitment and enthusiasm for our common goal and with his knowledge of corporate finance.  Some ten years my junior and with a young family, we formed an immediate bond.  With an accounting qualification and PLC experience, Mark seemed to have a good grasp of the challenges of running businesses.  Following a further meeting at which we explored each others values and beliefs in more detail we agreed to team up for the task ahead.  We were also realistic enough to agree that if either of us came across an opportunity that didn’t include the other then we would go our separate ways with no hard feelings.

Despite being based some 150 miles apart we soon fell into a productive working routine.  I continued my processes of identifying likely targets and an initial financial analysis and would send a batch of information to Mark who would challenge my assumptions and verify  (and correct, where necessary) my findings.  I was also heartened to find that Mark was able to offer pertinent comment and ask searching questions across the wider business spectrum.  Together I was convinced that we would make the core of a credible buy-in team.

Meanwhile, I had been having further meetings with 3i and formed an initial relationship and agreed a working methodology with Paul, an investment director and Mark T one of his managers.  The understanding was that I would continue my work in identifying likely targets and would bring to them a short investment proposal on short listed businesses we were intending to approach.  In this way we would know, in principle, if 3i were likely to back a serious bid.  There was a danger in this approach that had been put to me by other successful buy-in managers.  This was that there was a risk that 3i could take the opportunity and go with another (preferred) buy-in candidate leaving me empty handed. I put this possibility to one side, reasoning that I had to build a relationship with 3i that demonstrated my professionalism and commitment to them.  If I demonstrated I didn’t trust them (by floating potential deals around a selection of VCs in an effort to find the best deal as others had advised) how could I expect loyal backing from them?

Having been working on the basis that I would have to do all my own work in identifying targets, I was surprised when I received a call from Mark T.  Would I be interested in taking a look at a business (Halifax Fan) they knew was on the market?  There would be no commitment that they would either support a bid or that they would go with me in the event that they did.  We agreed to meet.  I had previously advised Mark T that, amongst a few other industries, I was specifically targeting the engineering sector.  It had already become apparent to me that many medium sized engineering companies lacked modern sales and marketing skills, often resulting in no or limited export markets.  My believe was that I would be able to bring these skills to such a business.  I was pleased to find that the company in question was an engineering business and it was based in Yorkshire.

We met at the premises of Halifax Fan for an introduction and an exploratory look at the business.  It was an interesting company that specialised in the design and manufacture of fans for a variety of industrial uses often employing unique designs for challenging applications.  It was profitable but what was really interesting was that the owner (who wished to retire) had deliberately constrained the growth of the company as he didn’t wish to have the bother of additional employees.  I could immediately see growth potential plus it also had the ability to grow via acquisition.  Having come away with a great deal of financial information I arranged a further visit to progress matters in a couple of weeks.  Meanwhile, Mark and I started work on our analysis of the financial situation and into the specialist market for industrial fans.  A further meeting with 3i soon followed where I presented our initial findings and plans and got a green light to submit a comprehensive business plan.  Following further adjustments our plan was accepted and we waited anxiously as it went to the investment committee for approval.  A week later I learned that approval had been gained and 3i submitted our joint bid to Halifax Fan.

We knew that other interested parties might be bidding and Mark and I waited anxiously once more following weeks of work.  A phone call another week later dashed our hopes.  We had been significantly outbid.  I was disappointed but I was also heartened that we had been taken seriously by 3i who took the bad news with a shrug and the question, “What else are you looking at?”  Mark and I pushed on with our list of prospects.

I had given up on the lighting industry following many unproductive approaches over the previous months but a chance conversation with an old colleague reawakened my interest.  “Do you know Neville is dying?” was the question that took me by surprise.  Neville had been a customer of mine for many years,  running a well respected lighting distribution business.  I also knew Neville well as I had taken him on a study tour of a selection of US & Canadian electrical distributors some years previously.  Notwithstanding the sensitivity of the situation, I called Neville, conveyed my sorrow at his illness and best wishes and after a brief conversation said I would like to buy his business.  My approach was referred to his chairman who I met some days later and learnt that the business had already been put discretely on the market.  My pitch of venture capital backing, knowledge of the business and personal credentials succeeded in gaining me an acceptance into the process.

Over the next few weeks I met with the management team, collected information,  visited the retail operations they had and burned the midnight oil with Mark carrying out detailed analysis and pulling together our basic financial projections.  We then applied various sensitivity exercises to stress test the model before I wrote up a very detailed business plan which I submitted to 3i.  We agreed an offer, the plan went off to the investment committee and, once approved, our bid was submitted.  I knew that our price was realistic and our plans (including selling off the retail side and acquiring other distributors) were rational.  I had even found time to approach and have initial discussions with our first post acquisition target.  However, a few weeks later our hopes were dashed once more as we received the news that a trade competitor had outbid us by 100%!

During this period (mid 1996) I was still processing large numbers of potential acquisition targets through my financial and strategic appraisal model.  Following this latest setback, I stepped up the pace, extending my networking and research activities.  Over the next six months we worked on dozens more potential targets, analysing them and their markets and got down to the shortlist with several others only to miss out to trade buyers who, once more, heavily outbid us.  It was clear that although many trade buyers had no magic dust to sprinkle on a business they did have the ability to carry out immediate rationalisation and effect synergies with their existing operations.  I was confident that my development plans for our targets were sound and we also had a ‘Buy & Build’ post acquisition strategy to acquire other competitors.  The problem was that we couldn’t (and 3i weren’t prepared to support) pricing the benefits of a potential subsequent acquisition into our initial bid.  I knew this made sense as it would have raised the risk factor sky high.

As 1996 drew to a close I realised I had spent 18 months working to buy a substantial business using venture capital.  I had spent months in the most intensive efforts to locate and analysis targets, reviewing hundreds of businesses in the process.  I had become increasingly more creative in my approaches to extend my networking and increasingly more professional in my research, analysis techniques and business planning.  I had been almost to the altar on three occasions only to be heavily outbid.  Attempting to buy businesses from larger companies was also not working as, once more, competitors were willing and able to pay far higher prices.

So, at the end of my first full calendar year there had been no result.  Instead I was beginning to experience growing tension between the work necessary to bring a suitable target deal to completion & the mundane task of earning money.  To put matters in perspective I was earning at a rate that was acceptable but I knew I could be very much more successful at the role of consultant if I didn’t have to spend time chasing acquisition targets.  On the other hand, buying a business was my unwavering goal but I couldn’t spend the time at it that I needed because of the need to earn money.  This tension was made all the worse by my practice of doing whatever I attempted to the best of my ability.

Before Christmas closed the business world down for the holidays, I put together a detailed presentation for Paul at 3i laying out everything I had done with a detailed appraisal of what was working and what wasn’t and reconfirmation of my goal of acquiring an engineering business.  When we met I shared with him the frustration I had in being diverted from the task by needing to earn money but ended with a commitment to bring them a deal we could complete together in 1997.

The Christmas holiday was a welcome break with the family but it proved just too tempting to continue working as my goal was constantly at the front of my mind.  I couldn’t remember wanting anything in business as much as I wanted this.  I knew I could succeed as a consultant but, although I enjoyed the work and gave it everything I had in the time available, it really wasn’t what I wanted to do long term.  It was becoming brutally clear that I had entered a marathon not a quick sprint.  Could I stay the course in the year ahead?  Or was I chasing rainbows?

 Image courtesy of thebridgemaker.com

The Business of Life Chapter 27 – no way back

Some people would say that it was madness, but I found it liberating to know that I had blocked off an escape route and that the only way was forward.  Having withdrawn from the job search process and informed head hunters I was out of the game, I had but one goal and that was to achieve a management buy-in (MBI).  To facilitate this process I had to earn just enough to support the household and preserve my savings for the stake I would need for my share of equity.  As John Major resigned the leadership of the Conservative Party to trigger a leadership election in June 1995, thus burning bridges in the hope of winning party support, I made my own play for future success.  My bid was rather less exalted but it was critical to me and had a similar air of ‘do or die’.No Way Back

A corporate finance partner at Grant Thornton I had met during the due diligence process at Selmar was my initial port of call.  “Why do you want to do this?” he enquired when I had finished laying out my plans.  “Because I can be a whole lot more successful at running businesses than most of the clowns I’ve worked for!”  “Wrong!” he shot back at me, “You stand in front of a venture capitalist and tell him that and you’re finished.”  I felt perplexed and my look must have revealed my confusion.  “You’re doing it for the money, you want to make shedloads of money for yourself and for them.  That’s what they want to hear.”

My first task was to commence my own due diligence on the process of achieving an MBI.  I started this by talking to several contacts, eitherold or new, who had managed to get VC backing to either buy-out (MBO) or buy-in to business.  Their advice was interesting but the one phrase that struck me as invaluable given my own experience with cash was, “Never buy what you can borrow and never borrow what you can steal!”

An essential element I absolutely had to ensure was in place was a contingent fee arrangement with a firm of accountants and a lawyer firm.  To get a deal to completion meant accounts and lawyers putting a great deal of hours on the clock for both accounting and legal due diligence plus all the work on the finances, deal structure and the sale & purchase agreement.  These costs would run to hundreds of thousands of pounds and without this ‘no win, no fee’ arrangement in place, failure to complete a deal would ruin me.  In the deal-charged environment of the 90’s all of the major accounting and law firms realised that without such an arrangement the deals would simply never happen.  The quid pro quo was an acceptance by VCs that transaction fees would be inflated for success.  It was a feeding frenzy.

The combination of my approaches and CV got me meetings with the corporate finance partners of every major accounting and law firm I approached.  A vast amount of highly practical advice flowed from these meetings, which was adding to my rapidly growing knowledge of the intricacies of the MBI process.  All lost no time in telling me how difficult it was to achieve and how risky it was to buy a company as an outsider, “You just won’t know where the skeletons will fall out of the cupboards!”  Knowing that it was going to be a lengthy and fraught process, the key aspect both parties were assessing was the personal chemistry.  There had to be mutual respect and trust, something that I was well aware of, but something that would also be brought into a stark spotlight in the future.  The result of many meetings was an agreement of backing from KPMG and Pinsent Curtis both in Leeds.

With one vital building block in place I started contacting all of the major VC firms.  Again I succeeded in achieving meetings at director level with every firm I approached.  The choice of equity partner transcended almost every other consideration.  Yes, you would share equity in a deal but management equity was a very subordinate animal to that held by a VC.  I knew that all firms could and would be ruthless in the event of non-performance but there were other considerations that I knew to be critical.  Most of the firms I talked to had a strict policy of exiting from their investments within a set time period, being driven by the way they raised finance.  I had met one management team who had almost been sunk by being forced to refinance as a result when their business was going through an appalling difficult period.

The one exception to this almost cast iron rule was 3i whose policy was that management drove the timing of exit.  With its roots in the Industrial and Commercial Financial Corporation and the Finance Corporation for Industry going back to 1945, 3i had probably more experience and understanding of financing private businesses than any other VC.  I had had a welcome and very useful initial talk with the head of the Leeds office and, following all of my other meetings, I decided that I simply had to get 3i backing.  The head of the Leeds office was Jonathan Russell (who went on to become a main board director) and underlying his smooth and urbane appearance and warm welcome was a very shrewd businessman.  After I had filled him in on my success in getting contingent fee arrangements in place with KPMG & Pinsents, he leaned back in his chair, nodded and enquired, “Anyway, how’s your job search going?”

This wasn’t a trap I was ever in danger of falling into and took delight in firing back, “I don’t have a job hunt.  I’ve closed all the corporate doors and I’m going to succeed in achieving an MBI with you.  That is my future.”  I was then vetted by Patrick Dunne (who ran their MBO / MBI programme) in London and was then able to benefit from the vast knowledge 3i had gained in this sector.  From their research I was able to ascertain just how many MBI candidates there were in the country attempting to achieve the same goal as me.  Comparing this number (over 2,000 from memory) with the number of deals actually completed each year (210 in 1994) was, at face value, disheartening.  Of these only 28 were MBI transactions that had been completed!  When I considered the reasoning behind Jonathan’s question about my job search and added this to the knowledge I had gained so far I realised that the odds were better than the apparent 1.4%.  Clearly some of the c2000 executives seeking a deal would also form part of a team of 2 or more.  I also knew from my research so far that the majority of people who claimed they had a goal of an MBI merely waited for the deal community to throw up an introduction to a potential transaction.  I had already decided that I wasn’t going to sit around waiting for a deal to show up, I was going to make it happen.  When I added this self-sufficiency to my competitiveness and determination, I decided the odds were rather better at around 8~10% pa.  Good enough for me.

I started work on a methodology for searching for suitable targets.  The advice I had been given so far was to buy a dog.  What was meant by this was buying a failing business and turning it around would yield fantastic returns.  The problem I envisaged with this approach was that the margin for error narrowed to almost zero.  Problems come from all angles even in a good business that one knows well but buying into a failing business raised the stakes dramatically.  No, I decided, I would buy a profitable business even if the price was higher but it wouldn’t be balanced on a knife edge from day one.  The obvious approach would be to attempt to buy a business in a sector where I was experienced, so the lighting industry had to be on my target list and I started making approaches to all my contacts in this sector.

I had drawn up a list of ideal criteria for a target company and this included:

  • Privately owned
  • No more than 3 shareholders and ideally same as directors
  • In business for between 15~30 years (potential retirement sale)
  • Turnover between £3m~£25m
  • Profitable and cash generative
  • Engineering, industrial manufacturing or distribution
  • Were differentiated in some way (or could be)
  • Had growth potential.

Obviously businesses in declining sectors were out and I also decided that I would have nothing to do with those selling consumer products into high street retailers.  I new that Companies House had all the information required to ascertain if the first 6 criteria could be fulfilled for a small fee.  However, there is no way one can carry out a criteria based search from this source (needles and haystacks).  However, I knew that there were many credit agencies and other research companies who bought the entire information from Companies House and compiled databases that could be searched by criteria.  Their fees were beyond me though.

Leeds business library proved to be an excellent halfway house for the information I required.  It had research reports on a vast number of UK business sectors and it had searchable databases that would give me a snapshot of likely companies.  In addition, the cost of information was only £0.10 a page.  I would blitz a business and geographic sector and come away with a single page on each of around 200 companies.  Returning to my office at home I would wade through this information refining it down into a short list of 20 to 30.  I would then arrange a meeting with Phil, the corporate finance partner at KPMG and we would then discuss each one and agree a final list of 10 to15.  Phil would then get one of his team to run off a complete financial history for the last 5~10 years in great detail for each one.

Back in my office I would then input all of the resulting data into a large spreadsheet model I had developed that would produce key ratios, further analysis and graphs.  The resulting report I produced for each company showed at a glance a clear picture of the health of each business plus all of the relevant trends.  I would put together any further information I could gather as desk research and then get together with Phil to review the results.  These reports together with our discussions enabled us to whittle the list down to 5 to 8 key targets.  Having discussed the various ways of approaching these targets Phil counselled that we would get a better response if he approached each company saying that he had a client with funding in place who was interested in a purchase.

Whilst carrying out this research I had been working my way through all of the potential businesses I knew in the lighting industry that were worth an approach.  I had meetings with a number of potential targets but despite serious interest from the owners there was really nothing worth pursuing.  I was waiting to hear of the results from the initial batch of letters Phil had sent out when he gave me a call and suggested we meet.  He explained he had information on a paper processing business that was for sale and he could introduce me if I was interested?

Was I interested!  After months of work I was off running with a lead on a business that was for sale.  Would it shape up?  Could I pull off a deal?

 Image courtesy of http://www.virtualdjradio

The Business of Life Chapter 26 – casting off the chains

On my first morning at Selmar Industries I arrived early.  After a quick word with the few managers and office staff who were in at that time, I went on a tour of inspection.  The company was housed in an old textile mill on the outskirts of Brighouse in West Yorkshire almost at the end of a tightly wooded valley.  The buildings were a veritable rabbit warren with both offices and production facilities spread across different levels connected by tight and twisting passageways.  A new warehouse had been added to the rear of the site some years before and the yard outside appeared to be a dumping ground for disused HGV trailers.The Business of LIfe Chpater 26

Following a brief session with the management I held a series of meetings for both office and production staff.  After laying out the realities of the present situation, I went on to share my personal values and inform them that we would be working together to turn around the fortunes of the company.  I then held a series of individual meetings with all of the board and management team.  The highlights of my new team were Jeff and Neil (not my group MD), sales & finance directors respectively, professionally capable, enthusiastic, committed and nice guys.  They also proved to be extremely loyal.

The rest of the board and management were way below the level of competence I had been used to and, to be honest, made my heart sink.  They offered a veneer of support but it was barely masking an underlying denial of the dire situation the company was in and any personal responsibility for their role in it.  To say that I sensed a potential resistance to change would be a vast understatement.  Quite the saddest situation I found I had inherited was that of the administration director (who I’ll call ‘P’).  How he ever came to be promoted to this level was a mystery.  It would transpire that whatever hour I arrived in the office or left, he was always there.  Though supportive and loyal, I found that he was way out of his depth and was working 18 hour days in an effort to survive.  Knowing the urgent task I had on my hands to stem the haemorrhaging of cash, I decided to make no immediate personnel changes, there would be time later.  I knew ‘P’ was out of his depth and tried to protect him as best I could but he ultimately resigned.  A couple of years later I discovered from an HR consultant that my predecessor had engaged her to carry out an assessment of the board.  She had found ‘P’ to be so far below average intelligence, she simply didn’t know how he could even hold down a clerical role.  Nothing had been done.

The product ranges of the three companies in my group included domestic and commercial battery chargers, cable reels and power cords.  The business also produced small transformers on a sub-contract basis for another company in the wider group.  The battery charger business had been a market leader (and perhaps still was) but it suffered from a number of problems that were at the heart of the group’s problems.  Sales were highly seasonal with winter producing a demand at least five times that of the rest of the year (more in an exceptionally cold year – and one of those was about to strike).  Production had to run flat out throughout the remainder of the year to build stock as it was impossible to produce sufficient to meet demand as it occurred.  Thus this major division of the business consumed cash for nine months of an average year.  Selling through high street multiples and producing own brand for some of the major retailers it was subject to intense price pressures.  With its many export markets it also had significant foreign exchange risk.  These problems were serious enough but they proved to be compounded by sheer internal incompetence as I was to find out.  The other two companies demand patterns were not as seasonal but were also subject to severe price competition especially the cable business.

Having been intrigued by the trailers in the yard I requested that they be opened for my inspection.  This revealed a horror story of incompetence and connivance.  Each trailer (and there were five or six) was crammed to capacity with components and the largest single category was injection moulded casings for battery chargers.  These casings were either for obsolete lines or had retailers’ own brands moulded into them.  The own brand versions were for current production models but we had lost the business and they could not be used because of the branding.  This was in addition to the warehouse that was also stocked to the rafters with raw materials.  Upon further investigation I found that this stock was sitting in the balance sheet at full value!  This meant the true losses of the company (£3m in the previous financial year) were even higher than the accounts showed.

Horrified, I summoned the members of the management team who were connected directly or indirectly to forecasting or ordering stock to the yard and asked for explanations.  Unsurprisingly, the excuses flowed with much finger pointing but mostly in the direction of my predecessor.  When I raised the subject with Neil (my boss), stating that we had to write these off he growled, “Make some profits first to write them off against!”  After continued investigation the causes became clear with system disconnects and plain incompetence at the root of most.  Many issues could be rectified without delay but others took much longer to uncover and put right.

If the stock situation was bad then the production processes were at least the equal and arguably much worse.  The main production floor housed five production lines for battery chargers, transformers and cable reels.  Two separate facilities existed on different levels for cables and commercial battery chargers.  The first impression of the main production floor was of a state of chaos with people, components and finished goods everywhere.

As an example the cable reel line had fifteen people who seemed merely to be getting in each other’s way.  Finding that one member of the technical department was a trained production engineer I took him down to the production floor and showed him the line.  His response was to tell me that he had done the original line balancing and that it called for only eight operatives.  When I asked him what had happened he claimed that my predecessor, when output needed to be raised, had simply thrown people at the line.  This time the excuse sounded true and I agreed to strip the line down to its original eight members.  The very next shift the slimmed down team increased output and kept it rising over the following weeks.  We started work on the other lines.

I turned my attention to the cable line that produced relatively simple standard products with moulded plugs and sockets at each end.  The process had a history of problems and never seemed to run to plan.  The production supervisor was Marion, a lady who seemed to carry the problems of the world, not least of which were related to her personal life.  I asked her to join me in her small office and asked her what she felt could be done to improve quality and output.  She looked wordlessly at me with world-weary eyes that were deep set, spoke of little sleep and many problems and shrugged.  It was clear that she had once been if not beautiful then perhaps at least pretty.  But a broken nose, black ringed eyes and poor skin had long since robbed her of any claim to looks.  I asked her again. She stared at me with those dark eyes showing a mixture of  suspicion and confusion and murmured, “I dunno.”  It was Friday and I suggested she had a think over the weekend and if anything came to mind to let me know the following week.  She walked off back to the line.  I went home that night despairing.

Arriving shortly after 7.30 the following Monday morning I found Marion waiting outside my office.  “You serious what you said on Friday?” she blurted out, “You really want to know what I think?”  We went into my office and I sat her down and assured her that I was, indeed, really interested in any views she might have to improve the line’s performance.  “No-one’s ever asked my opinion of anything, ” was her response, “but I’ve been thinking all over the weekend and this is what I think.” What followed was a succession of ideas that sounded sensible and easy to implement.  “Go ahead then.” I replied.  Her eyes came alive, “What?  Can I?”  Improvements followed quite quickly and were maintained.

An intractable problem was the night shift that was required to meet demand for the sub-contract transformer work.  Due to uncertainty concerning its future my predecessor had made a not unreasonable decision to use contract labour.  A contract had been signed with a local firm who recruited and bussed in the required labour from neighbouring towns each night.  The assembly tasks were relatively straightforward and the day shift was reasonable in its output and quality.  But the calibre of the people we were getting to work the night shift was dire.  I arrived in one morning to find that an entire night’s production had been lost to ‘an incident’.  It transpired that two of the crew assembled the previous night had been rival drug pushers who had decided to set about each other with machetes!

Output and cost of production slowly improved and the end of the financial year showed a reduction in the losses.  However, as soon as one problem was solved continued investigatory work revealed yet more.  We were by then winning more distribution but price competition was eroding any benefits gained from the lower production costs we were then achieving.  Component quality problems continued to be a problem especially the injection moulded components that came from another company in the wider group.  Attempting to resolve these problems always led to counter allegations of constantly changing demand, which I would invariably find had some substance.

Quite apart from the challenges of solving the cash drain problems of the battery charger business, we also had an unacceptably high level of product returns for damaged and faulty goods.  Carrying out a detailed inspection of our product packaging I found that the quality of the board used had been reduced to something that was totally inadequate for such a heavy product and many products were arriving at retailers damaged.  I then decided to test a number of our products myself taking a different model home each evening and attempting to follow the instructions.  My experience quickly proved that the instructions (even in English) were simply ambiguous at best.  God only knows what the myriad additional translations had turned them into but an unacceptable quantity was being returned as faulty purely because the instructions were unintelligible. .

 Into the second financial year it was becoming clear that with increased competition and the power of major retailers driving prices ever lower our efforts to improve UK production efficiency were never going to be sufficient.  With the greatest of reluctance I decided that the only future for the brand was to outsource production to the Far East.   Having made contact with several potential manufacturers, I headed out to Hong Kong with Jeff our technical director.  During that trip we visited many factories in mainland China, all were dispiriting places and, which combined with the fledgling infrastructure and teeming population, produced a hellish vision of a dystopian future.  Yes, it seemed we could achieve lower invoiced prices but quality and the lengthy supply line troubled me.  By the time we returned to the office the decision had made itself.  We had already received, via another route, a leaflet from an unknown Chinese manufacturer offering their products to us.  ‘Their’ products shown on their full colour leaflet were the samples we had left in China with our brand names carefully concealed!  It was just too risky to take the chance but events overtook me anyway.

By this time we had managed to pull the losses back to a break even position but added to the pressures within my business, our parent company was struggling to survive.  Neil my boss, with whom I had established a super working relationship, arrived early one Monday morning a few weeks later with bad news.  The group had decided, without reference to me and despite our elimination of £3m of losses, to close our operation in Yorkshire and merge with another group company.  I was informed I was to be made redundant but first had to oversee the sale of our cable business, again something that had been arranged by the main board.

For the next month or so I worked with the accountants sent in by the purchaser in the due diligence information gathering process they were conducting.  The sale concluded Neil informed me that I would have to work out the remainder of my contract (in some capacity) but ‘could take reasonable time off to seek other employment’.  The conversation turned into one of those blood on the walls events as I fought to achieve a clean financial settlement instead of working for another 10  months in some spurious role.  Not being able to reverse what was clearly a decision forced upon Neil by a cash-strapped main board, I engaged the services of a law firm specialising in employment matters.  A few weeks later I walked away with a cheque having compromised on a slightly lower sum.

This time there was neither rage nor sadness but simply the realisation that I needed to take stock afresh.  I had proved once more that I could achieve what required but to no avail.  Seeing the writing on the wall over the previous few months I had been quietly testing the market once more and had got to offer stage with a small US corporation.  However, my research on the company told me that I might well be going from frying pan to fire.  I was now 49 and had begun to feel that my corporate days were over and it might be better to draw a line than suffer the same fate again in a few years time.  My mind went back to Norman and his CVC backed purchase of GTE Sylvania and the decision wasn’t hard to make.  Reviewing my knowledge and experience I decided I could achieve a management buy-in (MBI) and I would.  I phoned the Americans and informed them I was withdrawing.  I then called all of my head hunter contacts to let them know that my time as an employee had come to an end.

I had barred and shuttered the route back into employment and, with my mind clear of distractions, I could concentrate on achieving this major new goal.  Could I do it though?  Could I really convince the venture capital community to back me with the millions it would take?

 Image courtesy of businesspundit.com

The Business of Life Chapter 25 – when it’s time to pick yourself up

The flight back from Geneva that evening gave me some time and space to get my thoughts together.  There was none of the rage I had felt when I had been fired from Akai 13 years previously.  Instead, what I felt was a mix of great relief and sadness.  The sense of relief had been something I expected, as working for Norman and Eddie would have filled me with horror.  This feeling was vindicated later that same year when a friendly head hunter shared his experience of dealing with Norman  But more of that in due course.

The sadness was an unexpected sensation.  I had spent all those years working for a company in roles that had provided me with enormous challenges, to which I had usually been able to rise.  The company had given me a superb business education, which I have since come to realise was peerless.  It had also provided me with rich and complex problems on which to apply my new found knowledge.  I still count some of the solutions I arrived at to be amongst the greatest successes of my career.  It was sad that middle management had not always been able to step back from their personal positions and embrace a new reality.  Strategic thinking had been subordinated to the protection of personal gain in many cases.  Nevertheless, I knew I was going to miss the company, the challenges it had provided and the people; even the ones who had frustrated the hell out of me.

One worry luckily I didn’t have was financial.  At least I was confident that I would find the next position before money became a problem.  With the savings I had accumulated and the severance pay I had received life wouldn’t be too bad.  I was under no illusions though as the UK was still recovering from a nasty recession.  For the moment I put that from my mind as I had more immediate matters to deal with.  I had an apartment in Geneva with more stuff accumulated over the previous year than would fit into a suitcase and I had to get it back home.  I made plans to drive over in a few days.  Speaking to a couple of my old team I discovered that they had already had a farewell lunch together but on hearing I was returning for a couple of days they decided to do it all over again – with me.

So, after a few days catching up on my sleep and delighting in being back home with Denise, I headed back over the Channel and through France to Geneva for the last time.  The lunch was bitter-sweet.  I was touched that they were all prepared to give up their time to meet with me once more.  It was apparent though that a number felt a lot less philosophical about the situation than me and it was clear that at least a couple were going to find it very tough to get another position as good as the one they had lost.  One saving grace for them was that Swiss welfare payments were a whole lot more generous than the UK but only for a time.  When the hugs and kisses were over we went our individual ways and I began the long drive back.

Back home in Yorkshire my first priority was to shake off the excesses of too many meals and probably too much to drink.  So, Tilly our Rottweiler joined me for long jogs across the moors around our home and gradually I began to feel good both physically and mentally.  Without a break I started work full time on the hunt for the next position.  In the following 6 months I travelled 20,000 miles attending interviews, networking and researching the market.  Contacts I had made were unstinting with their time and advice and the many head hunters I either approached afresh or renewed acquaintance with were generally extremely helpful.  Together with the advice I had previously received from Max, I was becoming more focussed and more professional in my approach.

Discussing the very exact profile a client had drawn up for a position I was reviewing with an extremely helpful recruitment consultant he suddenly enquired, “It was the same Norman that had run FKI that bought your old company, wasn’t it?”  When I nodded he went on, “God you had a lucky escape!  I had a brush with him a few years back.  He contacted me and said he was looking for half a dozen MDs.  Well”, he went on, “I thought Christmas had come early, so I asked Norman to let me have candidate profiles and I’d get back to him with a plan and an invoice for the amount we charge upfront.”  It seems Norman had responded, “Don’t waste my time with stuff like that, just get me the candidates and I’ll see if I like any of them.”

Things were certainly a lot tougher than they had been the last time I was ‘between positions’.  I was that much older, that much more senior and the number of openings higher up the greasy pole were that much fewer.  It became clear quite quickly that, despite my extensive contacts, I wasn’t going to walk into a senior role in the industry I had just left.  I think I was known as someone with strong views and a different perspective on things and that didn’t appeal to many.  In any case longevity in position was a hallmark of the industry I had been in and there was no game of musical chairs to join in.  Moving industries once again looked the most likely route back into gainful employment.  This bothered me not one jot as I had already worked in 6 diverse sectors and had found problems were invariably generic.

Drawing on the experiences I had accrued in my role in Geneva I reflected on the behavioural skill set that my role had really needed.  When I compared this with the psychometric feedback I had received over the previous few years, I realised that I had really been a square peg trying to fit a round whole.  Whilst the experience and knowledge I possessed had been more than sufficient for the role, my behavioural profile lacked the key political skills required.  I had the influencing skill alright but I clearly lacked what Phil Thurston at Harvard had referred to as ‘rat like cunning’.  My first approach to a problem or resistance was usually to summon the power of logic and rationality.  If that didn’t work I rarely shied away from a full blown, full frontal attack.  I could build and receive the loyalty and support of a team, I could understand the biggest of pictures and what was required to solve the underlying problems.  Yes, there was much I could learn of politics but, as I saw things, I was far more suited to leading than being led.

But my mind was beginning to move in a different direction.  During the final months in Geneva I had started to think of working alone as a consultant and had sounded out a few people I knew who had created successful careers in this way.  The advice had been to specialise rather than risk being known as a jack of all trades.  The obvious specialism was marketing strategy and I was pondering the prospect of setting up and promoting my own business when, in one of those amazingly serendipitous moments, my phone rang.

The call was from Gerard, the finance director of an old customer I had known for many years whilst with SylvaniaUK.  He explained that they had a problem he felt I might be able to assist with.  Was I interested in meeting to discuss the situation?  A few days later I travelled down to Croydon to meet Gerard and Steve, the MD of Jerrard Bros PLC.  The company had been founded by Steve’s father and uncle, had done well for many years but now required a new supplier of a key product.  Would I help them?  I said I would let them have a proposal.  During the visit it became clear that the company had reached a plateau over the previous few years and I probed for reasons.  I said I would also let them have some thoughts on working with them to address this issue also.  A couple of weeks later and after some good natured negotiation we had a business relationship based on two projects.

Almost straightaway I received two more approaches for significant projects and following discussions, proposals and more negotiations I found myself engaged to complete both.  One was a feasibility study for a foreign manufacturer looking to enter the UK market and the other was assisting a company looking to acquire one of my old, major competitors.  Very quickly I became extremely busy and drew a halt to any idea of seeking a new employed role.  I revelled in the freedom of working on projects that interested me at my own pace (although to agreed deadlines).   By now it was summer and I fell into a routine that, when I wasn’t travelling, I often cycled long distances in the Dales.  I would start early and return by midday and then work through until mid evening.  I had always found cycling conducive to thought and now I could actually keep fit whilst doing something I really enjoyed and apply my mind to various problems at the same time.

During my job hunting process I had followed a highly targeted approach seeking opportunities that had not even been advertised.  Each day I would scour the business press looking for news items concerning major companies that were either contemplating or had made major investments or acquisitions.  Whenever I came across a situation where I felt I could add value I would write to the chairman or chief executive (often to their home address so my letter wouldn’t be screened by a secretary).  I would either compliment them on their success or wish them luck with their plans and then spell a short but precisely targeted couple of sentences laying out how my experience could assist.  I would follow these letters up with a call aiming to achieve a meeting.  Several of these approaches got me in front of senior people.  I hadn’t succeeded in getting a new job from this approach but I decided I could use the experience to win new clients.

Another opportunity for creativity had arisen when I lost out after being down to the final two for a position running a national chain of builders’ merchants.  Having invested the time to carry out a great deal of background research on the firm and its competitors I thought it would be foolish to waste it.  I called the new MD, introduced myself as the guy who came second, congratulated him and suggested we meet as I had a proposition.  He was sufficiently intrigued to agree to meet me.  When we met I made the suggestion that as he was busy getting to grips with a big new role there was a way I could help.  He listened very carefully to what I had to say about the industry, the position of his company and the issues I had identified.  He considered for what seemed an age and then said he would be pleased to receive a proposal.  I went away and submitted a detailed proposal for a very focussed consultancy project.  He accepted but not before something else got in the way.

Towards the end of my period of applying for jobs I met a head hunter with whom I had established a good relationship.  Out of the blue he called me months later to say he had an assignment he felt was well suited to my experience.  We met and I listened to the facts he laid before me.  His client was Ross Group a small UK PLC with a number of businesses in electrical products.  They were seeking an MD for one of the group companies, Selmar Industries, itself a group of three businesses manufacturing in West Yorkshire.  The previous MD had departed after running up losses of £3.0m.  Smelling a dead horse, I declined to take matters further.  However, a couple of weeks later he was back on the phone pushing me to meet the Group MD at the company’s factory, “It’s just down the road from you, I’m sure you’ll get on famously with Neil and if you still decide it’s till not for you, well fine.”

The following week I duly arrived at Selmar’s factory, which was housed in old mill premises in a tight, wooded valley on the outskirts of Brighouse.  My heart sank; it looked a tip.  However, my head hunter chum was right about Neil with whom I quickly established a rapport.  He had also worked in major corporations and there was a basic understanding between us over how businesses should be run.  Nevertheless, after several hours of discussions I politely declined to take matters any further.  A week later Neil came on the phone to chat and pressed me to meet the chairman, “Nothing to lose, see what he has to say, eh?”  A long trip down to Basingstoke the following week produced a firm offer, which I rejected.  They responded with an improvement and promises.  By this stage, I have to admit, it had become something of a game, so I pushed on and won more concessions.  Finally I accepted but not before I had negotiated approval to continue my work with Jerrard Bros.

I was back running a group of businesses and was confident that I could improve them.  Would it work out?  Or had my pugnacious nature set me up for trouble again?

 Image courtesy of Eliasbadi.com