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.
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