The Business of Life Chapter 35 – when you can’t take no for an answer

ABC desperately needed to acquire a competitor.  If we didn’t then it was increasingly likely that we wouldn’t succeed in turning the business around and finding a buyer of our own.  We knew that acquisition of a suitable company offered us the only realistic opportunity to reduce the cost of sales, boost influence with major suppliers and make a step change in performance.  We also needed to acquire a competitor with distribution rights to certain ‘flagship’ brands.  We had a suitable and seemingly willing target but one huge problem remained; we had no money and no hope of raising any fresh capital. When you can't take no for an answer

The only option was to get the parent company of our target to fund our purchase.  Having worked for most of my career within very large organisations, I understood the type of pressures that can arise.  Someone in the organisation might be so personally desperate to offload their losses-making UK division that they might be prepared to find a way to finance our purchase.  So, having said we were interested at a much lower price than they wanted, we left them alone whilst they negotiated with a number of our other competitors.  No sale took place.

After about six months we approached them again with the following proposal; we would buy the customer list and the goodwill and pay for this out of a percentage of future gross profits over the next 3 years.  We required that they transfer the stock to us and we would pay for it as we sold it.  Any stock still unsold after 1 year, we could return.  They would make the entire workforce redundant and bear the cost themselves.  Finally they would retain the premises.  Following an agonising wait, they accepted our terms in their entirety.

We had assumed that only around 30% of their turnover would be retained but in the event we kept over 60%.  We also retained the distribution rights to the ‘flagship’ brands (having sounded out these suppliers in advance) and used these to grow our business significantly in our traditional accounts.  Over time we backed away from the poorer credit risk customers we had and replaced these with business grown from the higher quality new ones.

Our investment in stock settled down to a level not much higher than pre-acquisition despite the significantly increased turnover.  A key influence in this had been the previous identification that no one person in ABC (except Mike) had responsibility for the value of stock.  A product manager was appointed who, in addition to his responsibilities in managing the ranges, had responsibility for sales forecasting & absolute levels of stock.  With his efforts and skills, stock turns improved, our service levels got better & working capital requirements reduced.  We were often able to win business at regular prices because we were the only distributor with stock.

One of the most successful moves we made was to de-emphasise sales revenue.  In order to adapt to rapidly changing pricing levels amongst competition, it was essential to allow the sales team certain flexibility over day to day pricing.  The problem was that sales revenue was chased to the detriment of margins.  This was especially evident as every month end approached.  In an effort to remedy this we scrapped sales targets and moved to cash gross margin targets.  All access to sales figures was removed from the internal IT systems.  In our internal communications only cash margins were ever referred to from that point on.  The result was a steady improvement in margins that provided clear, additional profit.

Despite including some of the major global corporations (e.g. IBM) the behaviour of most suppliers was chaotic.  They lacked any evidence of a coherent strategy and seemed entirely reactive, capable only of using price as a variable.  We put together a detailed presentation that Mike then made to each of our suppliers.  In it we spelt out our analysis of the sector, our plans for the future and what we needed from our chosen suppliers.  We announced a supplier performance monitoring system together with an annual Supplier of the Year award.  Each month we shared the ratings of our suppliers across 25 pre-announced criteria.  The results were dramatic, with suppliers rapidly falling over each other to improve their ratings (and in so doing improving service to us).  Tangible support in terms of focussed co-operative promotional activity rose and with it our sales.  The year end saw a major one day event for all suppliers with awards given for the best in category and overall winner.  The programme cost us very little but grew in effectiveness each year.

Performance slowly improved and monthly profits started to be the norm.  Gradually, the losses on the balance sheet were being eliminated.  However, part way through this process one of the major customers was placed into administration owing us over £160k.  There was little hope of any recovery and most of the loss was uninsured.  We managed to cover the loss from the provisions we had built and a small insurance recovery.  The shock of this was severe though.  Strict new credit policies were put in place and the board agreed a new guideline that no single customer would be allowed to represent a greater exposure than a pre-set limit.  It was clear that we urgently needed to lift the quality of our customer base to continue building the business.  Many of the traditional customers were just too risky to allow the credit required to fund the extra volumes we required.

Priority then turned to improving the internal processes of the business and to improving profitability.  A range of Key Performance Indicators (KPIs) was identified for the entire business with weekly & monthly monitoring agreed.  These became the dials we all watched on the dashboard & formed the language we all talked within the company.  A complete review of the financial systems was undertaken and tight new accounting controls were put into place.

A reorganisation of the internal sales structure was achieved that established a series of teams comprising a Field Sales Manager plus a Customer Service Executive and a Telesales Canvasser.  This restricted the number of expensive field sales heads & beefed up the proactive telesales’ prospecting & selling activities.  Grouping them into discrete teams gave a sense of identity & team spirit.  The increased communication achieved within the teams greatly assisted sales results.  Various techniques were tried in an effort to improve the rate of proactive sales calls.  Finally, the ‘quiet room’ concept was born where each prospector went into a spare office for number of hours per week & made calls from a direct outside line with no distractions.  The rate of new business rose.

That some sales people were much better than others soon became apparent.  We suspected that technique was the cause.  External sales trainers were brought in to overhaul our sales approach & re-train the entire sale steam in a revised selling model.  The sales team loved the process and learnt many new lessons, which they were quickly able to apply.  Mike decided not to replace the sales director but to run the sales force himself (which he did with great leadership & drive).  Mike had a natural ability to lift spirits in the team.  Following a particularly successful month Mike would declare a beer and pizza outing to celebrate.  If the business had an especially bad month, he didn’t rant and rave but declared a beer and pizza evening to put it behind them!

Freed of the German company, we were now making profitable inroads into Europe via a UK based sales effort.  Curiously, Hull proved to be a fertile source for staff with European language skills.  The business went on to make three straight years of good profits and the balance sheet continued to improve, building thereafter to achieve a very healthy net asset value.  Finally, the remodelling of the business was rounded off with a change of name to ABC Technology Distribution Ltd.

The bank had been patient during this period and had finally let us leave the ‘intensive care’ department.  Mark T had moved on within 3i and had been replaced with Ian with whom I built a close working relationship.  The relationship however maintained certain protocols one of the most important being that I never allowed a parallel reporting system to creep in.  We were fellow shareholders with common risks and common interest but all the key issues were reported formally.  There was however a great deal of pressure to achieve a sale and I was constantly keeping Ian up to date on our plans whilst shielding Mike from as much of this pressure as I could.

We did have a very clear plan for a sale however, one that was clearly understood by the board and was one that we carefully implemented.  Mike had known the CEO (Mike B) of a major US distributor, Scansource, for many years and had ‘borrowed’ many of their business practices and strategies.  Having closely followed Asda’s emulation of Walmart, which directly facilitated the eventual acquisition of Asda, Mike’s stated intention of selling out to Scansource made a lot of sense to me.  One significant problem had occurred though.  Having opened a competing business in what Mike B saw as his backyard, the relationship had soured.

Now that we had succeeded in extricating ourselves from the USA, Mike attempted a charm offensive designed to achieve a rapprochement with his erstwhile mentor.  The news that we might be ‘on the market’ to such an obvious buyer was duly conveyed.  This did not achieve the desired effect and it was with dismay that we learnt that Scansource were trawling Europe looking for acquisition candidates whilst ignoring ABC and Mike’s blandishments.  We had to battle on with improving the business with no other realistic purchaser in sight.

Finally, Scansource came knocking on our door and negotiations for a sale began.  After a long, drawn out and frustrating process we achieved a sale in May 2002 for a healthy sum that gave me and all the ordinary shareholders a good return on their investment.  Additionally, Andy and I received a healthy incentive payment from 3i that had been offered to us 5 years previously in the event that we achieved a recovery of their investment.  Mike stayed with the business but this didn’t last long as making the shift from owner to employee was never going to be an easy one.  He went on to form another business in a related field that has been extremely successful.  And, in a strange turn of fate, the Scansource European MD ended up working for me in an unrelated business I formed some years later.

The previous five years had never been easy, firstly with the challenges of keeping ABC afloat, then of making that vital acquisition and going on to achieve a satisfactory sale.  This had been taking place against major problems in my other investments.  It was though, and despite the many pressures, one of the most satisfying times of my career working with such a cohesive and successful team.

Elsewhere life was equally challenging, frustrating, commercially dangerous and rewarding.  I was getting used to it.

 Image courtesy of thepoliticalcarnival.net

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Osborne’s employee rights sacrifice, equity for all scheme

Do politicians really think through the ideas they float?  Do they have any idea of the realities of business and especially the entrepreneur?  Come to think of it, do they have any idea of the complexities of business?Osborne's employee rights sacrifice, equity for all scheme

As a retired businessman who ran, bought, created and sold businesses, large and small in over a dozen industries, I have a reasonable knowledge of the problems facing business owners and the people who work in them.  I also spent many years in the layers below the top to have a fair understanding of the issues that face employees, what concerns them and what doesn’t.  Let’s start with the problem that Osborne is purporting to solve, the great employee rights and employment law burden.

Before the current edifice of employment law was created and forced onto business the policies that determined how employees were recruited, trained, paid, promoted, cared for, pensioned and fired were largely at the whim of the employer.  What this meant was that all of these factors were points of differentiation that clearly separated good employers from their bad competitors.  Working for Unilever in the 1960’s I enjoyed benefits and practices that would still be regarded as outstanding even today.  Has the welter of employment law really made things better for the average employee in the average company?

Consider first that small and medium businesses (SME) account for 99.9% of all enterprises and 58.8% of private sector employment.  To the vast majority of these businesses employment law brings little benefit over and above that which enlightened owners and managers strive to achieve without the aid of the law.  But it also brings huge compliance costs and the threat of many disgruntled employees running off to employment tribunals.  Today a malicious ex-employee can wreak havoc upon a good employer.  Maternity leave can also create a nightmare for small companies.  There will always be bad employers just as there will always be bad employees.  We must ask ourselves what we have really gained by forcing policies borrowed from some of the country’s (and the world’s) largest companies onto our SMEs.  And that is before we should ask ourselves what role corporation tax and employers national insurance contributions do for employments levels.

So, if Osborne is recognising at least part of the problems facing employers here in the UK with his equity for rights proposal, shouldn’t we be applauding his scheme?  Sadly, I don’t think we should.  I believe that it is another dose of borrowing concepts of best practice from the largest corporation that will do nothing for the 58.8% of private sector employees who work within the SME sector.  And nothing for the company owners of these businesses.  Let me explain why.

There are already employee share ownership schemes that are used by large companies.  Usually these shares encourage employees to save and should they leave or require the cash then there is a very liquid market waiting to buy their shares.  The risk, of course, is that the value of the equity falls (remember Northern Rock).  Overall these schemes do not represent more than a fraction of the total equity of the company and do not carry voting rights or eligibility for dividends.  Are they effective in engendering concepts of ownership amongst participating employees?  Or are they just a savings scheme?  Would such a scheme encourage employees of these large companies to give up their rights?  And would having two tiers of employees be of real benefit to the company?  You decide.

However, when we turn our attention to the SME sector the problems become significant.  In privately owned companies equity is usually guarded closely by owners or can be very limited in number (£100 companies are quite common).  The reason for this is quite simple.  For those owners who wish ultimately to sell the business to achieve a return, then they wish to retain the largest percentage of equity they can.  For those businesses that are run as family concerns then there is little intention to sell and equity is often held in a web of different generations of family members and trusts.

There could be attractions for an SME to set up such a scheme as a means of opting out of employment legislation.  Any benefit for the employee could be completely illusory.  Why?  The issued value of any shares provided in such a scheme is likely to be low and any return only available when (and if) the company is sold.  Given that there is no market in equity held in privately owned shares, any departing employee (for good or bad reasons) would be at the mercy of the company in deciding a price for buying them back.  The cost of setting up such a scheme would be quite high.  Would it raise meaningful sums for a startup or early growth business?  Not a chance.

Of course there are already businesses run as cooperatives but these are tiny in number.  There are also those businesses who run employee share ownership schemes, these usually being very large companies with differentiated cultures and attitudes towards employees.

In my view if Osborne really wishes to help both private employers and employees he should scrap swathes of employment legislation (as it frequently strangles employment opportunities in 99.9% of private enterprises).  He should also reduce or eliminate corporation tax and employers national insurance contributions both of which act as a tax on employment.

Time to scrap the idea, George.  conference season is over for another year.  Just go and talk to a few SMEs before the budget.

Image courtesy of guidetowomen.wordpress.com

The Business of Life Chapter 34 – life under water

Earlier in 1997 I had been asked by 3i to review a technology business they had backed that was being viewed increasingly as a ‘problem child’.  I agreed to meet the two main director shareholders of Advanced Bar Coding (ABC) to see what the situation was and if we could work together.  The business, a distributor of bar coding products, had been formed by the joint MDs in the early 1990s.  It operated from an industrial estate in Hull where it had offices, warehouse and a technical department.  Approximately 60 staff were employed & turnover was around £8.0m (having grown by approximately 35% each year since formation).  There were two other members of the board, a Sales Director & a Technical Director.Life under water

The situation I found was dire.  It was clear that the business was on the brink of insolvency having lost £1.0m in two disastrous investments in the USA & Germany (with the losses increasing each month).  The bank was threatening to withdraw their overdraft and had placed the management of the account into the hands of their ‘intensive care’ division.  The factoring company were reeling in their advances due to the poor credit record of many of the customers.  Margins were slender and seemed to be slipping with each passing month.  On the initial visit I got on well with Mike and Alan (the joint MDs) and was subsequently appointed to the board as a non-executive director.  The total investment made in the business by the shareholders and the bank was, to quote a phrase, “below water”.

Mike was a volatile powerhouse, a dynamic and successful salesman, totally committed to his business but very autocratic and appeared lacking in broader-based business & strategic skills.  His energy was inexhaustible but at times he seemed merely reactive to events.  The other main shareholder, Alan, was a quieter and amiable individual who acted as Finance Director (despite being completely unqualified).  We started work on a revised business plan to try to convince the bank to stay with us while we turned the business around.  A core element of the plan was withdrawal from both the USA & Germany.

The meeting went well but the bank refused to support the plan unless 3i and the shareholders increased their investment.  In a separate meeting they also conveyed that any further support would be conditional on a restructuring of the board.  Specifically they required that Alan step down as joint MD and Finance Director and be replaced by a new and suitably qualified accountant.  I was appointed chairman and required to invest, as was the incoming FD.  3i agreed to inject a modest amount of further capital and the whole package was conditional on finding a buyer of the business without delay.

Mike and I had agreed to approach the subject of Alan’s departure in a joint meeting with him and I hoped that we could resolve the matter, if not amicably, at least following due process.  An early demonstration of Mike’s volatility was not long in coming.  I arrived on the morning allotted for our meeting with Alan to find no sign of him but was greeted by Mike in an agitated state.  “I’ve fired him,” were the first words he uttered, “I couldn’t stand him any more.”  It seemed a row had blown up early that morning between the two of them resulting in this potentially disastrous turn of events.  Not only were we liable for a clear cut claim for unfair dismissal but there was the not insignificant matter of Alan’s equity.

Upon inspection of the Shareholders’ Agreement I found that there was no provision in it that required Alan to sell his equity back to the company in the event of his departure.  Given the dictate we had been given to sell the business, the prospect of a disgruntled Alan with no requirement to sell his shares rendered this possibility almost impossible.  I proposed that I met with Alan and asked Mike to have no contact with him.  Over the next week or so I shuttled back and forth in a diplomatic mission that ultimately resulted in us buying Alan’s shares back for a nominal sum.  With the bank onside, albeit with a reduced overdraft (and ABC still in the intensive care department), the factoring company agreeing to continue support and 3i making their additional investment, we were only left with a small number of mountains to climb.  We now had to extricate ourselves from the USA & Germany, find a buyer for the business and, without delay, find a new FD.

In the event this last requirement proved relatively painless and Andy joined the team first as a consultant and then formally as FD.  An accountant with a very commercial outlook, good venture capital experience and somewhat of an IT expert, he also had the invaluable experience of having been part of a team that built and sold one extremely successful company.  He was a thoroughly nice guy who fitted in well but something of the iron fist in the velvet glove.  If Andy felt a particular course of action was not either legally, procedurally or ethically right then you knew that it was not going to happen.  Colin the technical director was supportive but I had my doubts about Jay, the sales director (who soon moved on as the business became progressively more structured in its approach).

The three remaining board members became the most successful team I have ever worked with in my entire career.  If anyone from outside had been an observer at many of our board meetings they might have thought we stood no chance of success as violent argument was not unusual.  But we proved Meridith Belbin (probably the world’s first, and arguably the best, expert on team-working) right.  Successful teams don’t need to be harmonious affairs, in fact dissent often ensures full examination of the relevant facts and the available options and leads to successful decisions.  Mike grew in my estimation.  I can’t imagine how tough it must have been for him to be planning the sale of his treasured business although I did know that a sale was something he hoped would never happen.  A previously successful entrepreneur, he had seem his creation grow and then fail, saw little or no hope of a return on his investment and had to welcome onto the board two outsiders who questioned every assumption about the business.  We certainly had blood on the walls at times and Mike would often storm out of the boardroom with a face like thunder when a decision went against him.  But always, and often within the hour, he would seek me out and tell me that he had already implemented (or put into motion) whatever change was required.

Mike knew everything about the industry we were in and everyone in it.  The problem was that his knowledge was vast at the micro level but it was akin to a huge database without a search facility that could link aspects together.  He had always existed previously making rapid decisions and usually without reference to others.  The business had been Mike’s train set.  I was worried however that he lacked the experience or toolkit effectively to analyse the industry and our place within it.  He didn’t know what he didn’t know so often he didn’t go looking.  If we were to stand any chance of turning the business around and selling it on (let alone making a return on investment) I knew we had to have a coherent strategy, one that would take us out of the maze we were in.  Mike had resisted initial attempts to instigate a full strategic review.  “Waste of time,” he would claim, “I know everything about this industry and this business.”  Finally, he agreed to a rigorous process of strategic review and over several long meetings, by a process of research, brain-dumping, questioning and probing a clear picture appeared that the whole board could grasp.

In a highly fragmented channel, it was clear from our research that ABC was market leader in distribution.  This leadership stemmed from high levels of customer satisfaction, driven by an industry leading catalogue, great depth and breadth of stock, a superior technical infrastructure and a uniquely proactive telesales process.  Critically, we had premises and systems that could support at least double our current sales.

We had a customer base with a low level of creditworthiness, poor sales and marketing expertise below Mike and suppliers (some of whom were well known global corporations) with chaotic distribution strategies, poor service and zero demand building activities.  It was also now clear that we were suffering from a lack of certain key ‘flagship’ brands.  But overwhelmingly we suffered from a continual cash drain from the USA and Germany operations and a balance sheet with a £1m hole.

It was apparent that there were actions we could take to improve matters such as boosting our technical services and expanding our specialist product ranges, both of which provided superior margins.  We urgently needed to improve the quality of our customer base and lessen the risks we faced from bad debts.  But, far and away, the only option that offered a real step change in our fortunes would be to acquire one or more competitors.

Prices across the whole market were falling year on year and manufacturers continued to dump stock further depressing prices and margins.  But the greatest threat facing the business was of the bank ‘pulling the plug’ completely, leaving us with no means of raising the capital we needed to turn the business around.

The situation the business was in could be summarised as being fraught with problems and opportunities!  There was also only a very limited window of opportunity to act.

Mike admitted that he had learnt a great deal from the process & a new strategy was agreed by the board to move the business towards achieving a sale.  We were still living from hand to mouth in cash terms and were very exposed.  We desperately needed access to the ‘flagship’ brands to improve our offering in every category.  So, the suppliers of the brands we required were approached to allow us to gain access.  An agreement was reached with the least important of these, however the main two companies still declined to add us to their distribution base.

The obvious solution that had emerged from our strategic review would be to buy a competitor & transfer all business to Hull, thus improving sales & profits in one giant step.  We researched all competition & identified the half-dozen most likely candidates who had the key brands we required.  Meetings were held with all of these; some were initially interested in a sale, some refused.  But the crushing difficulty was in obtaining further funding.  Following meetings with both the bank and 3i to present our proposed strategy, both agreed that acquisition was an excellent idea but flatly refused to lend more to achieve it!

 Over the next six months and only following a great deal of effort (initially attempting to improve our operations) we finally succeeded in withdrawing from the USA and Germany.  A small but significant victory was receiving an ex gratia payment from one of the big four accounting firms that recognised faulty due diligence work they had carried out in Germany had led to the problems we had encountered.  We were still technically insolvent (with huge negative equity) but we had stopped making losses and, painfully slowly, each month we were starting to reduce the hole in the balance sheet.

Priority was then given to improving the internal processes of the business and to improving profitability.  Much work was done to analyse the customer base, sorting them into categories.  The sales force was now targeted with specific objectives against each of the main customer groupings.  Certain customers were ‘de-emphasised’ and left to competition.  However, we still could not break into certain of the best potential customers due to our lack of the remaining key brands.  The only remaining way we could gain access to these was via acquisition.  The problem was that we couldn’t raise a single pound more finance.

Of the discussions we had been having with a number of acquisition targets, one of these was owned by an American parent, primarily involved in software.  The UK products distribution business was losing money heavily, the parent was very keen to sell but they wanted serious money for a sale.  The business was ideal as it had both of our target brands, had an excellent customer base (a good percentage of which would be new to us) and had leasehold premises we did not need.  We estimated that we would need none of their staff and could transfer the entire business to Hull.  We also felt that we could grow sales of our product range via their customers.  A perfect match.  We left them with a statement that we were very keen to buy but that their price was too rich for us.  The chances of them selling to us seemed remote as we simply couldn’t raise any money.  The only option left would be to get the American parent to fund our acquisition.  But would they?  And if they wouldn’t, what future would ABC have?

We were still way ‘under water’.

  Image courtesy of lakedistrict.gov.uk

The Business of Life Chapter 33 – like snakes without the ladders

On the day we acquired the Metal Spinners group of companies (MSG)I drove the 100 miles to Newcastle to take control of our new acquisition after just two hours sleep.  Following months of tortuous negotiations that I swear would have sent a saint insane, we had completed the transaction at 4.00am that morning in our lawyers’ offices in Leeds.  Roger, Mark and I now owned (along with 3i, our equity partners) a specialist engineering business that had been formed in 1953.  Along with our nearest competitor, we were jointly the largest such firm in the UK.

Like snakes without the ladders

 Our business strategy, which had won us the backing of 3i & Allied Irish Bank, included not only growing the MSG business organically but buying up a number of our competitors, rationalising production and ultimately selling on the business.  However, that morning when we addressed the workforce in two mass meetings at our largest factories in Newcastle, we spoke only of our commitment to the business and of continuing investment.  Whilst Mark set about the process of ensuring that we had firm control of the company’s finances, Roger and I set off with Clifford (the previous owner) to meet some of the major customers.

 The meetings went well and Clifford was companionable and co-operative enough.  The following week I travelled with him again to meet more customers as Roger immersed himself in the production processes.  This time little inconsistencies began to emerge in Clifford’s accounts of a number of aspects of the business and it wasn’t long before Roger’s assessment on meeting him for the first time came back to me, “I wouldn’t trust him as far as I could throw him.”  Given Roger’s size advantage I was prepared to allow Clifford some latitude but doubts nagged at me when he became increasingly evasive over what should have been straightforward matters.  This evasive behaviour plus a word in Mark’s ear from the management accountant as he departed for a new life in Australia sent what had been merely niggling doubts into full blown alarm.

The more we dug into the company’s affairs the more our doubts rose until we had a dossier of concerns that we laid before our lawyers.  Their advice was that we had significant claims against the vendors plus a damaging potential problem with HMRC.  Warning letters from our lawyers were sent out that were initially ignored only eventually to result in a counter claim from the vendors.  Additionally, as the stakes rose and the acrimony mounted, towards the end of that first year Clifford demanded repayment of the loan notes he had issued as part of the sale and purchase agreement.  These loan notes (which gave Clifford the tax advantage of spreading part of the consideration over two years) had provided a large chunk of our working capital and were repayable on demand to Clifford.

Word was at the same time filtering back through the local business community that Clifford was claiming we had no idea how to run the company, would be forced into administration and he would buy the business back for a song.  Hearsay, yes.  But the demand for repayment of his loan notes could have been fatally damaging.  However, our business was performing extremely well and we had built something of a cash mountain by year end.  We repaid the first loan note, pushed on with the claims and over the next two years incurred huge legal bills in progressing our investigations and the claims.

The business was certainly performing well and Roger, Mark and I had settled into our respective roles.  Roger had his hands around his role of MD and his wealth of experience not only as an engineer but someone with immense knowledge of the steel and engineering sector worldwide was proving ever more valuable.  With complete agreement over strategy, I had immersed myself in two key tasks.  The first was ensuring we progressed our legal claims in the most effective manner.  The other was researching companies in our sector seeking out potential acquisition targets.  Other problems were growing though.

 “We need a word, “Roger said one day, closing my always open office door, “We’ve got a real problem with Mark.”  He then proceeded to spell out a litany of concerns he had over Mark’s ability and performance as financial director accompanied by hard-hitting evidence.  I was shocked.  I had seen Mark work tirelessly with me over the previous two years through one rejected bid after another.  I had been impressed with his understanding of corporate finance and his grasp of the wider aspects of business strategy.  I had seen Mark go through a particularly difficult period in the month prior to our acquisition when it looked increasingly like the transaction would be successfully completed.  His dilemma had been over timing of his resignation from his existing role as FD in a small Plc.  I had needed Mark full time from the very first day if we were successful and he would have to resign at least a month ahead of our scheduled competition.  In the event he had resigned but with a young family it had been a difficult decision to give up financial security.  I said I would speak with Mark.

 The process that took place over the next few weeks was far from easy.  I liked Mark, enjoyed his company, had been impressed by his financial judgement and knew his family well.  I felt committed to him for his support over the previous few years but the evidence that he was failing was overwhelming.  It was not a matter of experience, he certainly had that.  The problem appeared to be that he lacked many of the competencies required for the role.  I prepared for our meeting by reviewing the requirements for the role of finance director, covering every aspect of the role.  I shared our concerns with Mark and provided him with a copy of the list I had drawn up.  I suggested he took a week off to consider how he felt he matched the requirements of the role.  He agreed to do this.

A week later we met and I was saddened to hear from Mark that he accepted that he was deficient in most of the key competencies required for his role.  Nevertheless he felt he could improve.  What he was basically admitting was that he did not have the aptitude for the key aspects of his role.   Roger and I discussed the situation at length.  We were just a three man board.  Having recently acquired a large and demanding business, with a potentially crucial legal claim unresolved and with the tasks of reviewing and improving every aspect of the business, we could not afford to be carrying anyone.  With a vast amount of debt, external shareholders and financial backers, it was essential that the financial systems and processes and the man responsible were bombproof.  Quite apart from our considerable personal investments, we had to consider the wellbeing of over 150 employees, our customers and suppliers.

Parting company with Mark was another low point of my career.  But I believe that the process and timing of our approach enabled him to forge a career more suited to his undoubted skills and competencies before the situation degenerated into one infinitely more damaging to all concerned.  Certainly the relationship with our financial backers was going to be critical over the next few years and the role of FD would come under the spotlight on many occasions.  Luckily for all concerned, as a result of experience, our shareholders’ agreement made explicit provision for dealing with the transfer of equity in such circumstances.  Mark went on to forge a new career as a financial advisor, a role he was well equipped for.

Once more we were thrust into the task of finding a suitably skilled and experienced executive to join our team.  In the event the hunt was not a lengthy one and after a thorough process Malcolm joined us as FD and became a fellow shareholder.  Having worked with Roger in a previous business for many years, he was a known and able man who made a strong contribution to the business (although I do have to say he seemed to operate occasionally on a unique and personal time and priority system).  We were a team that would work well together.

Over the next year or so the process of updating both the fabric of the company, its systems, procedures and equipment gradually sorted out the able employees from the also-rans.  We were pleased to be able to support and enhance the roles of those who were skilled, loyal and committed but were not sorry to wave goodbye to a few who decided they couldn’t or wouldn’t change.

When we had acquired the company we had inherited well over 1,000 customers on our sales ledger.  Following a complete strategic review, including analysis of each and every one, we found the best margins were flowing from those customers for whom we produced the most demanding and technically difficult components.  These customers also had one other characteristic in common – they all produced a final product that absolutely must not fail during life.

This review enabled us to form a strategy of concentrating on identifying, reaching and influencing those potential customers in certain key industries with the most demanding needs.  This strategy led us into major investments in new plant, equipment and engineering techniques.   But it also gave us the security that when we converted such a critical and demanding customer to our process, there simply wasn’t another company that could replace us.  We were to suffer the agonies of our largest customer (a global giant) constantly trying to replace us as a way to drive prices down,  ultimately finding that no-one else in the world could do what we did.

As we were moving towards the end of our second year we had drawn a blank in trying to find a worthwhile competitor to acquire.  Exhaustive research and meetings with a number of the most promising firms had failed to reveal anything worth acquiring.  The picture was emerging of a sector of the engineering world that was continually fighting over the same narrow amount of business for components that were traditionally made using the process of spinning.  Furthermore, the only weapon in the armoury of these firms seemed to be price.  As a consequence almost none of them were making any worthwhile profits and they hadn’t been able to invest in new equipment or techniques.  In short, they were caught in a vicious downward spiral.

Our own newly confirmed strategy seemed to make more sense than ever.  Why fight the competitors in our own sector for commodity components where prices were terrible when there was business we could win from other processes?  Yes, it would be far harder but there had to be business out there we could take from other engineering processes where we could win on technical advantage.  The opportunities were global, the challenges were significant and Roger was itching to get stuck in.

 Meanwhile, events seemed to be conspiring against me once more.  Not only was Bridgestream looking decidedly sickly but another of my investments was beginning to show signs of terminal ill health.  And then an even worst piece of news struck just after that second Christmas that had appalling potential consequences.  Malcolm telephoned to let me know that Roger had been taken seriously ill.  Just how many problems could come at the same time?

Image courtesy of thinkbrigade.com

The Business of Life Chapter 32 – when death becomes inevitable

 When death becomes inevitableWith Richard gone I appointed Tim as MD, we started the hunt for a finance director and commenced the process of producing a new business plan for the next twelve months.  However, we quickly discovered that, such was the mess in the accounting systems, 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 transpired to not be worth the paper they had been printed on deemed more like a work of fiction.  Worse, the VAT was overdue and the VAT accounts had not been reconciled for months; indeed it looked as if they never could be. Whatever vestiges of empathy I had for Richard quickly evaporated.

With a twelve month plan completed, Tim and I presented this to our finance company to plead for additional time.  We then 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 3i, we 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 suffered 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.  Out of the calls I made, two produced meetings that showed interest and I progressed these.  Further discussions led 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 in this uncertain 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 that 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.  With the sale achieved, 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 with our creditors.  We presented the full story including 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.  This proved to be of 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 face to face) 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.  That same day I appointed the accountancy firm I had met as administrators and arranged to meet them at the office the following morning.

The next day 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 that which it was 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 long years taking all of the money they raised in their own fees.

Against the backdrop of this sad and frustrating failure, I was by this time also heavily committed in what was to become an even longer running and equally challenging saga in the other 3i investment where I was now chairman and part owner.  Whilst up in Newcastle, the Metal spinners investment was also becoming more challenging by the day.  Was it all going to end in a disaster?

The Business of Life Chapter 31 – the gathering storm

Having successfully acquired the Metal Spinners group of companies I was elated But the glow of post-deal euphoria was destined to be short-lived.  As I started the process of taking control of the businesses with Roger and Mark problems in the other companies were bubbling to the surface.   I shall be returning to the MSG experiences in due course but, meanwhile, there are other tales to tell. The Business of Life chapter 31 - the gathering storm   

 The failure rate of new businesses is high with around one third disappearing within their first three years.  But once through this initial period the rate of attrition falls and many businesses survive to have a long life, weathering even the odd recession.  Business risk is omnipresent but there is one circumstance where the greatest risk arises and that is when a new owner takes control.  Research has shown that the majority of acquisitions work to the benefit of the vendor’s shareholders.  There are many reasons for this phenomenon, including inappropriate strategy and culture being introduced and sometimes sheer incompetence on the part of the new management.  But the greatest problem for even the best new incoming owners, despite the most exhaustive due diligence, is that they simply don’t know where the bodies are buried.

Introduced by 3i to become investing chairman for the acquisition of the Bridgestream business (not its real name), I had become the third member of the buy-in team.  The impression I came away with my initial meetings was that the team leader (we’ll call him Richard) was a great guy; originally a chartered accountant from one of the major firms and well experienced in business.  Richard was charming & urbane and we hit it off at once.  The other team member, Tim, struck me as a solid and dependable man who would make a great operations director for the business.  There was the added advantage that they had both worked together previously on another 3i investment.

Bridgestream was, at the time, a privately owned service based business with a large distribution arm for the products it used.  I reserved judgement until I could carry out my own due diligence.  The following week I visited, met the owner and had a chance to look over the main premises.  Being after office hours I wasn’t able to meet any of the staff or get a feel for the atmosphere of the business while it was operating (confidentially concerns on the part of the owner had precluded a visit during normal hours).  I came away thinking, the premises are old, they had a neglected feel and I didn’t take to the owner (I’ll call him Offhand).

However, when I reported back to Mark T at 3i it seemed we shared the same view.  The business was not a particularly exciting one but the plan the team had tabled seemed realistic and we both shared a very favourable opinion of Richard.   Furthermore, it seemed that he came with a tremendous recommendation from the references that had been taken.  We agreed it would be a goer given a ceiling on the purchase price, a satisfactory funding package plus my role as chairman and the experience I could bring to the team.

Richard, Tim and I worked on a detailed reworking of the business plan whilst we awaited the financial due diligence from KPMG.  A series of meetings with banks and factoring companies resulted in finalisation of the funding package and my individual equity investment was settled.  I was surprised to learn just how large a cash stake Richard and Tim were putting up.  They had originally planned to complete the transaction without external equity participation but suffered when, being unable to finance the deal on that basis, they had revealed to 3i just how much they could scrape together (and that was then set in concrete).  The final element of the funding package was an element of vendor finance in the form of a deferred element of the total consideration.  The vendor haggled but finally conceded.

Shortly before completion, we met to receive the financial due diligence report.  There was good and bad news.  Whilst the overall level of company performance was confirmed, it seemed that the financial systems were not particularly robust.  There were two associated companies, only one of which we were purchasing (the distribution arm), the vendor retaining the service business.  The concern was that the accounting systems couldn’t be relied upon to always delineate between the two companies.  Richard undertook to work with the vendor to review the systems and finalise a working capital level for completion, which would then be guaranteed.

Negotiations over the sale and purchase agreement dragged on but we finally completed the transaction with everyone happy.  We were the new owners of Bridgestream (along with our VC equity partners 3i) of a distribution business with eight branches around the UK and two separate operating divisions.  For myself, I had made my first private equity investment.  However, even as we sipped our champagne and accepted the congratulations of our advisers, the storm clouds were gathering.

With the glow of success (or it might have been champagne) 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 (albeit 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 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.  This was a situation that moved us from being seriously injured to virtually crippled.  Richard quickly spoke to Offhand who made soothing noises over the matter and promised to look into the situation.  We hastily re-ran our cashflow projections and calculated that, with changes to our payment terms and some savings we could make we might survive; but we needed that cash.  Now.  The next call was to our lawyers.

Despite many calls to Offhand, no payment was forthcoming, so on our lawyers’ advice, we instituted proceedings against him for breach of contract.  Offhand’s reaction was to issue a counterclaim claiming repayment of the deferred consideration.  As the months dragged on I attempted to engage Offhand in an 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 our action.  The legal processes rolled on and our costs duly rose.

Meanwhile, the cash situation was not improving.  We were surviving but barely and the prospects of a new loan to compensate were zero.  Towards the end of that first year, the directors all agreed to reduced salaries.  Richard had previously agreed to replace the management accountant (we had acquired with the business) as he was, in Richard’s own 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 informed him I required a programme of specific actions over the next month (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 showing benefits and along with the staffing reductions our overheads would come down (after the effects of the redundancy payments had fed through).

Yet another turn of the screw came when the financing company rewarded our stock reduction programme with a corresponding reduction in their advance.  The promised sales improvement failed to materialise and combined with our reduction in stock financing we were seeing no improvement in cashflow.  Richard was pleading the need to concentrate on finalising 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 break-even position at the year end.  He also promised that the cash situation would quickly improve 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 conversation 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 and was going to close the account.  I promised immediate attention to the issue and asked, on my personal surety, for additional time to resolve matters.  By this time I had also gone many months without payment of salary and other business expenses I had incurred.  The following day I was due to meet with Richard and Tim at KPMG’s offices 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 break-even result Richard had reported (critical to the continued support of our financing company) was in fact a very 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 at 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?  

 Image courtesy of viralblog.com

 

The Business of Life Chapter 30 – trust and integrity

With two management buy-ins (MBI) completed plus appointment as non-executive chairman of two other firms, it could reasonably be argued that I was more than fully occupied.  However, the two MBIs were not deals that I had initiated and I had only a minority equity stake in each.  So, my goal remained that of acquiring a substantial engineering business as head of my own MBI team.  Things were looking up with a heads of agreement signed and a period of exclusivity guaranteed to acquire the Metal Spinners group (MSG) of companies based in Newcastle upon Tyne.The Business of Life - Trust & Integrity

Mark and I set about the process of refining our business plan for the acquisition.  We now had a complete team of advisors with Phil and Ian (one of his senior managers) at KPMG providing corporate finance advice and Jonathan a partner at Pinsent Curtis on the legal side.  Paul and Mark T at 3i were working with us to ensure we could complete this transaction (following our three previous failures where we had been heavily outbid) and add another investment to their portfolio.

The original MSG company in Newcastle had been formed in 1953 by Clifford’s father and had grown steadily, supported by continuous investment in equipment from the leading German manufacturer of the CNC spinning lathes the business used.  This continuous investment had enabled the business to constantly expand its range of capabilities.  With its low level of exports and the possibility of offering solutions to a range of different industries I was excited by the development possibilities MSG offered.  I made time to visit the various Metal Spinners companies in Newcastle, Manchester and Birmingham to carry out a detailed review of the facilities.  There were five factories spread over these locations with a total production area in excess of 150,000 sq ft.  Whilst the range of equipment was of high quality it was clear that all of these factories were old.

Clifford was a curious character; slight of build and height he may have been but he seemed to posses a vitality that spoke of commitment to the business he had inherited.  The only other working shareholder was Mike, the finance director who had been with the company for many years.  I felt that I had established a good relationship with Clifford and this impression was reinforced when I called on one occasion to confirm a further meeting when he invited me to stay at his house the evening before.  Following a very pleasant dinner at a local hotel we retired back to what I discovered was Clifford’s holiday house (some 35 miles north of Newcastle) where a bottle of fine cognac settled us into a conversation that lasted long into the night.  Clifford, perhaps lubricated by the cognac, talked at great length of his life and his family. The following day the meeting went well and I drove back to Yorkshire convinced that our relationship was stronger than ever and that the deal was really going to happen.

A day later Mark T called me, “What on earth went on at your meeting? he enquired. “Clifford just called me to say that he can’t trust you and the deal is off!”  I was stunned.  Going back in my mind over the entire period we had been together I could recall nothing that I had said or implied that could have given Clifford any cause for concern.  In fact, during the entire time we had spent over dinner and back at his house that evening I had merely been an attentive listener to Clifford pouring his heart out over many very personal issues.  It made no sense and I called Clifford who finally agreed to meet me.

Seated together in a hotel just off the A1 a few days later, I attempted to get Clifford to share whatever concerns he felt he had with me.  His demeanour had changed significantly and he was evasive and imprecise speaking only in the vaguest of terms concerning his new-found lack of trust in me.  “OK,” I responded ” then I will call the acquisition off.  If you have no trust in me, and I really don’t know why, then there is absolutely no basis for trying to complete what will be the biggest transaction either of us has ever entered into.  If you do wish to complete the deal then I must know that you have no reason to mistrust me.”  Clifford stared away in the distance for what seemed an age and I could almost see the mechanics of his brain working.  Finally he turned to me and said he would withdraw the comment; no further explanation was offered.

This was the second time in a few years that someone very important to me in business had poured out the most intimate details of their personal life to me only subsequently to turn on me without warning.  I could only assume that both Swaanen  and now Clifford had, upon reflection, felt that they had let their guard down, revealed too much, felt weakened and decided to get their defence in first.

It was increasingly clear that I needed to supplement our team with the addition of an experienced engineer who would be destined to become managing director upon completion.  I started a process of trawling through contacts offered by our various advisers and other contacts.  With the deal community in full flow in 1997 (and destined to reach a peak of buy-in / buyout activity in 1999) and the business world still shedding senior executives, there was no apparent shortage of candidates to join our MBI team.  But when I had completed my essential selection criteria the list got very much shorter.  Finally, following many fruitless meetings and interviews, as a result of a 3i introduction, I met a seemingly perfect candidate I’ll call Pete.   Mark and Mark T both agreed and our team was complete.

My business life had become increasingly frenetic but was still hugely enjoyable with every day bringing fresh challenges (that I shall return to later).  So, it was with a mixture of surprise and regret that I faced the fresh question from Mark T “How much time are you intending to spend on the MSG business if we succeed in this acquisition?”  Given that three of the roles I held were as a result of their introductions, I was a little annoyed at the inference that I wouldn’t be able to cope.  I reasoned to him that with our new team member in place as MD designate all would be well in future.  It was clear from his reaction, however, that all was not well now and something had to give to maintain their support for the MSG deal.

The previous year I had agreed to become non-executive chairman of Jerrard Bros.  Working closely together we had refocused the business and the management team and profits had increased.  However, Steve the major shareholder (and son of one of the founders) was becoming increasingly visible as the major problem.  Previously unhappy in his role of MD and wishing to be freed from the demands of people management he had expressed a strong desire to simply concentrate on product design.  So, we had reshuffled and recruited and once again events were proving Steve to be the problem; his one responsibility, a new product, was woefully behind schedule and he was blaming everyone else.  With 3i’s implicit message that something had to give ringing in my ears, and knowing that the company was 90% owned by Steve, it was his train set and I knew that I was flogging a dead horse.  I resigned at the next board meeting.

The next few months brought fresh frustrations and challenges not least of which was a growing concern over Pete.  Despite his qualifications and experience I was becoming concerned at how little he was contributing to the process.  Mark and I were working every conceivable hour to pull the ever increasing stream of due diligence information into our business plan and I called a meeting to review the latest iteration face to face.  Pete contributed nothing, instead spending the entire time attempting to massage a previously agreed package higher.  When he returned to ‘needing’ a Jaguar XJ6 once more, Mark and I looked at it each other and I decided it wasn’t going to work.  Pete was dropped.

Now some three weeks before a scheduled completion date, I had no managing director candidate on the team.  I had agreed with 3i that my role would be that of executive chairman spending a minimum of two weeks a month in the company but that was predicated on my having a full time MD in place.  Without an engineer as MD, it was simply not going to work.  I called Mark T and Phil and let them know what had happened in my best low key manner and assured them a replacement was no problem.   Except that it was a major one.  I saw more candidates but no-one was even close to being right.  Apart from the big company experience I wanted someone who would be at home in a hands-on role in a medium sized company.  No luck and time was running out.

The results of the KPMG financial due diligence were due and two weeks before scheduled completion I travelled to their Newcastle offices to receive the briefing.  All had gone well with their investigation and as I was leaving one of the local managers put his foot against the door of the lift to prevent it closing, “Are you still looking for an MD?” he enquired, “I played golf with a great guy yesterday whose also trying to do an MBI.”

When I met Roger two days later in the 3i offices in Leeds we found we had a very much aligned view of business.  A highly qualified and experienced engineer, his CV showed everything I was looking for and he was happy to join the team on what looked like a done deal.  After a brief meeting with Mark T, we shook hands on what we both hoped would be a mutually rewarding relationship.

The next couple of weeks flew by in a whirl of constant meetings to review the legal due diligence, environmental surveys, the latest version of our financial projections, obtain bank finance and to discuss the equity split with 3i.  This latter aspect gave rise to a ‘blood on the walls’ dispute with me fighting unsuccessfully for the team to retain more than 50%.  In the end I had no alternative but to settle for just less than this figure but I did manage to win some other very useful concessions.  In the last week there had also been a very frustrating meeting in the office of MSG’s lawyers in Newcastle.  Very late in the evening with a couple of key issues still to be resolved, the main partner stood and declared he was going home!

Finally, the morning of the day for the completion meeting found Roger, Mark and I gathered in the offices of Pinsent Curtis in Leeds.  Most of the day wore on with little happening initially.  Allied Irish, our debt funders, arrived during the day in  the company of a supercilious lawyer to agree the finer points of the banking agreement.  I won nothing from that negotiation.  Clifford and Mike arrived late afternoon and were shown into a separate room along the corridor.  It was only at this late hour that we got to see the disclosure letter they had brought, raising fresh queries over the warranties we required. The pace quickened with what seemed like a fair impression of shuttle diplomacy as lawyers from both sides hurried back and forth attempting to resolve one query or another.

Despite the seven months of painstaking work it had taken to get matters to this point fresh information seemed to be arising in a flood.  Newly discovered potential problems required perhaps a provision against the price we were paying with an amount held in escrow or a deduction in the price.  Each of these problems required a delicate negotiation with, by now, manifest mistrust between the parties. The evening wore on with a painfully slow resolution of one issue after another.  Then, at one o’clock in the morning, Clifford and Mike walked out and disappeared somewhere into night-time Leeds, pausing only to inform their lawyers that they had had enough and might be back or not.

Almost the last issue we had on the table at this point was our requirement for a deduction to cover repairs to the roof at the Manchester factory, something that had only come to light in the last day or so with a surveyors report.  The sum involved though relatively minor may well have been the last straw.  All we could do was sit and wait to see if they would return.  Time ticked by and then two extraordinary events took place, which to this day illustrate to me integrity and honesty and what happens when it is lacking.

Quietly sitting on my own in a corner of the maze-like, old building, trying to relax and remain positive while hoping that all these months of work for everyone had not been in vain, Jonathan the head of our legal team sat beside me.  “Look, don’t worry,” he said quietly and very precisely, “if there are any issues still remaining we can get these sorted out later.  The key thing is to get the agreement signed tonight.”  I couldn’t belief my ears.  I had gained enough experience to know that problems in legal agreements only got worse with time and involved huge additional fees.  I waved him away.

Some time later, Ian from KPMG, also sought me out, solicitously enquired how I was holding up and then counselled “Look, if everything isn’t right to your absolute satisfaction, walk away now.  They’ll be other deals but for God’s sake don’t sign an agreement you’ll live to regret.”  I looked up at him and could only nod and squeeze his shoulder.  KPMG in the shape of Phil, Ian and their whole corporate finance team had put a simply massive number of hours on the clock on my behalf and if this deal fell through they stood to wave goodbye to fees well into six figures (and probably very healthy personal bonuses).  Absolute integrity demonstrated.

Seeking out Roger and Mark I brought them up to date on the two conversations and asked their opinions.  The response was immediate and unanimous; get it right or we walk away.  Mark T was in agreement; he’d seen the results of too many bad agreements.  Shortly after Clifford and Mike reappeared and disappeared with their lawyers into their meeting room.

A few minutes later and the remaining issues were resolved (at least to our satisfaction).  We were then ushered into the main board room where a sea of documents was laid out for our signatures.  The formalities completed, champagne was poured, backs were slapped, thanks exchanged and words I cannot remember were uttered.  It was 4.00am on the morning of the 8th July 1997 and I had (with a simply huge amount of debt and VC finance) become the owner of a substantial engineering firm that was a leader in its sector.  I later learnt that our deal was one of only 54 MBI deals completed in the UK that year.  Not bad for a lad who’d left school at fifteen with no qualifications.

I crawled into bed at 5.00am, rose again two hours later and drove the 100 miles to Newcastle to take control of our business.  Life was about to get more complicated than I could ever have imagined.

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

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?

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