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The Business of Life Chapter 43 – Postscript (part 1)

It’s been almost two years since I sold up and retired.  The transition from hectic business life to retirement has taken more adjustment than I could have envisaged.  I hadn’t ever spent any real time imagining what life would be like when business ceased but the reality has taken me somewhat by surprise.

The Business of Life - Postscript (1) The euphoria lasted some weeks – a month or so.  I saw more of family and friends and that was very satisfying.  And a few health problems intervened to take and shine off things.  But very soon I started to get that old, nagging sensation that I needed a challenge.  I started a number of new activities before the world of blogging began to draw me in.  I had always enjoyed writing, even starting the great novel about twenty years ago (it still languishes unfinished enjoying a quiet life on a succession of hard drives).  The one thing I had intended when I did stop work was that I would write and had promised myself I would finish the novel.

 However, it was business thoughts and anecdotes that got me started with ‘The Retrospective Entrepreneur’ blog and it wasn’t long before I realised that I had the material for the book I wanted to write.  It was researching the life and times of my paternal grandfather that made me realise that there was a side to my life that had remained largely unknown to my family and certainly would to my granddaughters.  So, I started to write ‘The Business of Life’ and that has enabled at least many of the facts to be recorded along with all those anecdotes.  But now the tale has been concluded, I have realised that it still shines a light only on a part of my business life.

 Looking back I can see that what I have written leaves many aspect of the real me unrevealed.  Trying to strike a balance between the business and the personal aspects in a way that would satisfy all possible readers was a worthy enough aim.  But what was it that really drove me on?  What emotions and beliefs underpinned the decisions I made?  Did I really consider the consequences that the choices I made would have on my family?  Are there things I could or should have done differently?  And yes, are there regrets?

 So now I’m going to take another look back to try and answer these and other questions.

The issue of nature versus nurture has occupied psychologists and sociologists and a great many others for many years.  As the continued unravelling of the secrets of DNA accelerates and a backlash against politically correct thinking occurs, I expect we may find a definitive answer in my lifetime.  But what of myself?  Did the factors that drove me on and enabled me to succeed come from my genes or from my environment?  And does it matter?

The children of first generation Irish-Italian immigrant families, my elder sister and I had few advantages.  Our father was a cabinet maker and mum was a seamstress and we lived in what today would be viewed as absolute poverty.  But we both passed the 11 Plus and both went to grammar school, something comparatively rare in our neighbourhood.  Our families comprised solely of manual workers with the exception of an uncle who did well enough as a minor civil servant and a cousin who rose to run a major insurance company.  However, these were relatives I saw but rarely, therefore I don’t believe anything rubbed off there.  So if my sister and I had the odd extra grey cell or used what we had a little more efficiently, it might well have been something nature caused to trickle down through the gene pool.

 Apart from my father ensuring I was encouraged to discover for myself the world that books revealed, there was another aspect of my upbringing that must have had an effect upon me.  In our neighbourhood (like so many others at the time) kids played out in the streets, communal gardens and little parks at all hours.  But not my sister and I.  My parents resolutely refused to let us join in informing us that we were “better than that lot.”  Finally, at age 13 I had become big enough and determined enough that they couldn’t control me any longer and I took my place in the local pack.  After an early event that could so easily have brought me onto the wrong side of the law, I learnt to pick my new friends with more care.

 Only one friend from my neighbourhood remained as I entered my twenties.  It wasn’t a conscious decision, there just wasn’t a sufficient range of common interests to bind us together and so we drifted apart.  One effect of my enforced solitude I am (and certainly was at the time) acutely aware of was a lack of social skills.  At least I now know that to be the case.  At the time I was always the quiet outsider who never initiated a conversation or any activity.  I remember railing late into the night to my sister, on more than one occasion that I hated small talk and only wished to discuss things that really mattered.  I can only assume that the many years of pre-teenage solitude robbed me of the chance to acquire some form of social skill.

 Over the next few years my interests diverged from the local lads as I discovered I had no interest in football (one visit to watch Millwall play saw to that) or cricket and rugby and, instead, joined a weight training club and developed a taste for jazz, blues, folk and classical music.  When I entered the world of work, aged fifteen, the ties with my erstwhile friends fell away (with one exception, Mike, until his untimely early death).

I hated authority with an intensity that has stayed with me to the present day.  This was not helped by the beating regime at my school.  I was never that distressed by the regular canings I received from the sadist that passed for our headmaster (Brother Peter – a nice religious man) as I probably deserved them.  But when I was beaten for fighting back against the school bully, that did it for me and authority.  Even though my tormentor was absolved of wrongdoing, I did have the satisfaction of knowing that he had been carted off to hospital to have his face stitched up.  No-one at school tried pushing me around after that.

When I turned my back on education and started work I had no clear ambition.  Although reading had given me many insights into the world at large, I had no knowledge of where I might go in terms of career in order to succeed.  The majority of my neighbourhood pals had followed fathers and uncles into union dominated areas such as the ‘print’ (don’t believe for one minute that nepotism and patronage is the preserve of the middle and upper classes).  All I knew, with a burning intensity, was that I wanted to go far enough up the ladder that I could never fall all the way back to where I had started.

By the time I entered the workforce I was determined to learn as fast as I could what it was that would cause me to progress.  Anything or anyone who merely wanted to plod along or play the system, I shunned.  I sought role models I could respect and I learnt from them as fast as I could and, in turn, I supported them to the extent of my abilities.  Years later when I was reviewing my CV (following my final departure from corporate life) I made an interesting discovery.  My greatest successes had come in positions where I had worked for a person I had respected and enjoyed working and constantly going the extra mile for.  All of what I consider my failures came in roles where I reported to someone who proved incapable of engendering respect in me.

 I never enjoyed (and therefore shunned) team sports.  I think that this was another result of my enforced exclusion from the endless impromptu football and cricket matches played in my neighbourhood.  Sport was never played at my junior school and by the time I entered grammar school I simply had no skills or knowledge to demonstrate.  However, I have always been ultra competitive and was always quick to respond to a challenge or a dare (inevitably bringing me into yet another brush with authority).

 For many years  I thought myself to be an introverted loner (probably as a result of my enforced childhood solitude) .  Certainly I have never been afraid to be my own man, frequently taking the lonely path and a book always seemed a reasonable companion.  However, it wasn’t until many years later when undergoing training for the Myers Briggs Type Indicator (MBTI) qualification that I found that I corresponded quite clearly to the preference of extroverted behaviour.  For those who are interested my type is ENTJ (Extraverted Intuition with Introverted Feeling).

 Isabel Briggs Myers defined the ENTJ type as “Natural leaders and organisation builders.  They conceptualise and theorise readily and translate possibilities into plans to achieve short-term and long-term objectives.” She goes on to describe them as likely to be: “analytical, logical and objectively critical; decisive, clear and assertive; conceptual and innovative theorisers and planners.”  There are downsides to this type, which include, “Becoming overly impersonal and critical; being intrusive and domineering; and being abrasive and verbally aggressive.”  I largely recognised myself from this description.

Are leaders born or created?  I really don’t know the answer to that question but I do believe that everyone can learn to improve how they lead and that differing situations bring a requirement for different types of leader.  I had no influences of leadership that I am aware of in my early years but I was put in charge of a patrol in the Scouts aged twelve and then became troop leader at fourteen.  Having been given my first business to run at age twenty-nine, I suppose I must have shown some degree of leadership potential.  So what was my leadership style?

 Those who worked for me are best equipped to answer that question and I am certain that there are as many that saw the negative aspects as there are those who can recount the positive side of my leadership.  I have always believed in delegation but an interesting insight into this aspect came from Vic Vroom (a Professor of Psychology at Yale).  Following analysis he described me to be a clear believer in delegation, except in two circumstances; where time was of the essence and where I did not trust subordinates to make the right decision.  I can certainly identify with this description.  When I had a good, well trained team (as I did at Sylvania UK) I trusted them implicitly to make the right decisions.  When faced with a failing business and a team that sadly was lacking both experience and ability (as I found when appointed to turnaround Selmar), my style had to be far more decisive and authoritarian.

I find it sad that many senior politicians claim that they know they are doing ‘the right thing’ (usually when they are incapable of providing a logical explanation for their actions).  In business we have company law and legislation to guide us through many of the difficult situations we may face.  Despite my dislike for authority, when I fully understand the logic behind the regulations, I find it easy to do the ‘right thing’.  When I was called upon to make some of the hardest decisions (such as firing a friend and colleague and calling in the administrators) I knew that my actions were both legally correct and morally defensible.  Not taking these actions would have exposed creditors, other shareholders and employees to far greater risks.

With a life long thirst for learning I have always been interested in why people differ in their need and preference for learning.  A few years ago I came across the Learning Styles concept, pioneered by Peter Honey.  Taking the questionnaire I found my learning style preferences to be strongly for Theory and Activism (with lower scores for Reflector and Pragmatist).  This would explain my thirst for acquiring theory and a rush to put it into practice where relevant.  However, it also explains why I suffered from leaving the impression at so many interviews of ‘being all theory’ (despite my attempts to explain how I went on to successfully put theory into practice).

 Certainly, I have always tended to describe myself when asked, as being analytical and logical and I count myself fortunate in having had ample opportunity in my career to apply these behavioural traits.  And, looking back, I am fortunate to have succeeded more than I failed in my business endeavours.  It has also been possible to see how the negative aspects of my behaviour (and yes, every strength has a potential downside) have caused pain to others around me.  Not least of these have been those I loved the most.

 In the next part of this retrospective I will try to examine the emotional issues that I faced in tackling some of the problems I had to deal with and the consequences these had on those around me.

Image courtesy of Maiden-voyage-travel.com

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The Business of Life Chapter 39 – brought down to earth

Life had never been dull at Metal Spinners Group but on a personal level I had settled into a routine that most weeks saw me travel up to Newcastle on Tuesday morning and return on Thursday evening.  Having invested my entire savings in buying the company (along with my stake in Bridgestream and ABC technology Distribution) I resisted what might otherwise have been a temptation to buy somewhere in Northumberland.  Instead I stayed in a variety of rented flats & B&B’s in the peaceful village of Corbridge culminating with the delightful Jill at Priorfield .Brought down to earth

Travelling had always been a part of my life and if I had to spend longer than a week in the same place I would become restless.  Now the international business wanderings had largely become a thing of the past but I had been wearing out a succession of cars covering 25~30,000 miles each year.  Whilst the time spent away from home was not something Denise enjoyed it did provide me with plenty of guilt free time alone.  The long hours on the road provided valuable thinking time and evenings alone permitted ample time for reading and whatever work I needed to do at whatever time I chose.  I also managed complete box sets of The Wire and The Sopranos, vast number of books and was always up before six either swimming, walking or working out in the gym.

In corporate life I had frequently felt I was under relentless pressure to make decisions with insufficient time to really think things through.  Owning and sharing the running of up to six businesses, all in different industries, all at the same time, might seem a less than responsible thing to have tackled.  However, this lifestyle did in fact help with many problems.  Simply having the time to think more deeply about all of the options and their potential implications overnight helped a great deal and the reaction to phone calls tended to become, “I’ll get back to you first thing.”  Having this time to myself was invaluable but there was one area it didn’t always seem to help.

Business partners can be a great help especially in broadening the range of  experience and skills within the team and the sheer advantage of others with whom you can chew over problems.  But, like a successful marriage, a business partnership requires respect and trust to succeed.  In opting for the role of chairman in these businesses I had to take my hands off the day to day levers of control and place trust in the partner who was MD to make these decisions.  Unfortunately, and to my great cost, Bridgestream was an example of what can happen when trust is abused.  Despite this the majority of my business partners have been entirely trustworthy but it didn’t stop me chewing my fingernails down to my elbows on occasions.

Roger was a vastly experienced chief executive with great depth and breadth of knowledge of the engineering sector worldwide.  He was also a proud and independent man and attempting to look over his shoulder or double guess his judgements would have been sheer folly.  Having worked with him on the broad strategy for the way forward, I would step back and give him the time and space to implement.  After the initial year working together we ceased holding regular board meetings for the most part.  Instead, we would frequently just sit over coffee and discuss progress, problems and the key issues.  Often no decisions would be taken but I knew that, having taken a sounding and gained another view, Roger would then make whatever decision he felt appropriate.  One such decision provided me with more than one sleepless night.

Our largest customer (one of the world’s largest industrial concerns) was forever attempting to drive down the cost of purchasing by one means or another.  Roger informed me one day that he had found out that they were considering moving a major component away from us to another metal forming process.  “It won’t work, though,” he said casually, “I’ve paid for an engineering feasibility study and it proves it won’t work.”  He then shared the study with them but subsequently learnt that they were still pressing ahead with the trials.  “They’ve said they are going to take full production away from us,” was his next report back, “and they are refusing to renew our contract.  However, they want us to produce the samples but that is going to work out very expensive for them!  If we’re not getting the production volume at least we’ll go out on a very profitable high.”

With our largest (by far) customer threatening to take away the largest piece of work we did for them I tried not to think of life without them.  Yes, the margins for this work produced were lower than other business we had and this would blunt the effect of the volume loss, but it was still a nightmare scenario.  Some months later Roger bounced into my office. “Guess what?” was his greeting.  “The new trials are going wrong and they have asked us to drop down to the price we had previously agreed for production volumes.”  My spirits lifted.  “I’ve told them to get stuffed,” he went on, “no contract, so they continue to pay sample prices.  It’s not our fault their other process won’t work.” “Oh shit,” I thought.

A couple of months later when Roger and I sat down with Malcolm to review the accounts, they showed a giant leap in profitability.  “Good this sample business, isn’t it?” smiled Roger.  Over the next year our customer howled and squirmed but kept ordering and the profits mounted to such an extent we were able finally to pay down our remaining debt.  We also got a new contract.  Life on the roller coaster.

In 2006 we decided to see if we could sell and we appointed Deloittes in Newcastle to market the businesses and act as advisors.  Initial discussions led us to the conclusion that it would be extremely unlikely that we would succeed in finding a buyer for both of the companies we owned within Precision Engineering International.  We decided to put Trisk on the market first with the target of Hedson our largest competitor who had failed previously to buy in 1999.  After a long and increasingly fractious process we succeeded with a sale of the business and heaved a sigh of relief.  The only problem was we were left with a very large factory site in Sunderland as they quickly moved production to Sweden.

With Trisk sold we turned our full attention to the MSG business and Malcolm and I put in a vast amount of time pulling together the required information for the sale prospectus.  A global research programme was carried out and a shortlist of 20~30 prospective purchasers was assembled and contacted by Deloitte.  The interested parties were then supplied with the detailed information pack, which resulted in a small number of offers.  Unfortunately, there was only one offer that looked at all worthwhile and this was from a small northern VC.  By this stage our relationship with Deloittes had become somewhat acrimonious over the modest amount of senior management time that had been spent on our account.  Negotiations commenced and it quickly became clear that there were a number of real stumbling blocks to a sale.

The first issue was that Roger was being viewed as indispensable (and at that stage he was) resulting in the condition that he remained with the business.  This was compounded by the requirement that he roll over a large proportion of his sale proceeds into the new company.  Given that 3i still owned just over half of the equity it would mean that Roger would gain very little in cash terms from a sale.  This was bad enough but there was another major problem.

Due to the growing market in China our largest customer had been once more making demands of us and this time it was for us to open a joint venture factory there with them.  We had run the projections on such a project and come to the conclusion that because of the additional costs involved there was no way we could ever make money from the venture.  There was another insidious risk to such a move; with a far Eastern partner in a joint factory our unique technical know-how could be copied.  In the UK no outsider was permitted to observe or film our processes.  By this stage we had learned that there was no one else in the world that could match our capabilities.  This came to light when our ‘loyal’ major customer approached the manufacturer of our equipment to find another supplier only to be informed we were really the only choice anywhere in the world.

Shortly afterwards the purchase offer was withdrawn due (as we later learned) to the threat of a potential £2m investment in China.  By this stage Roger had negotiated a deal to supply sample production to China, promising that we were committed to the joint venture.  Gradually production volumes and shipments to China grew and the concept of a joint venture disappeared.

Following the collapse of the negotiations a strategy was devised to put the business into a more saleable position for the future.  This involved a new drive to widen the customer base (especially in the USA) and to eliminate the dependence upon Roger.  The first step was to commence a search for an MD for MSG and create an operational board for the company that would take control (over time) on a day to day basis.

We had made two previous attempts to recruit a potential replacement for Roger and, despite sparkling CV’s and wonderful references, both had proved to be incapable of the role.  It had become clear that attracting the right calibre of executive was extremely difficult.  We needed a mechanical engineer with large company experience and commitment to continuous improvement and someone who wanted to move into a smaller business.  By this stage we were very profitable and by far the largest company of our type in the UK (if not in Europe), our previously equal sized competitor having all but disappeared.  We were prepared to put together a very attractive offer for a suitable candidate.  But the problem with our two previous executives was that they seemed unable to adapt to life in a smaller organisation.

However, a new threat emerged that was of far greater immediate concern.  I got a call from Ian the executive at 3i who was our official contact (I had managed to avoid having a 3i executive appointed to our board back in 1997).  Ian and I had worked together during the years we had been turning around ABC Technology and had a good relationship.  I knew (from my years as a member of an unofficial group of investing chairmen 3i put together to advise on ‘problem investments’) that they had been slimming down their investment portfolio in businesses that were not of substantial size.  The word from Ian that day was we were being put up for sale in a bundle of around 40 businesses.

This prospect filled me with horror (as it did Roger and Malcolm when I reported back).  An unknown new VC owner who most likely wanted to meddle in our strategy and turn a quick profit was not something any of us could see any advantage in.  I called Ian and asked him if he felt 3i would be receptive to an offer from us for their shares before they put us up for sale.  I got an affirmative but with the caveat that we would have to work quickly to raise the money and complete the sale process.  We had the advantage that Roger had known the regional director at HSBC for many years, who proved very receptive to the prospect of financing our loan.

The negotiation with 3i proved somewhat more difficult than I had imagined and whilst they had no objection to a sale to us they were certainly no pushover.  The worst aspect was a ‘non embarrassment clause’ that held that we could not sell within a defined period without making good to 3i the money that they would have made had they not sold their equity to us.  Given that we needed time to complete our strategy we agreed and the sale and purchase agreement was completed.  The downside was that we moved from being debt free to being the proud possessors of a very large, shiny, new 5 year loan.  But the upside was that Roger, Malcolm and I now owned 100% of our business.  Thoughts of selling were put aside as we pressed on with expanding the business and paying down the new debt burden we had acquired.

Frustrated with the time wasted sitting in  traffic jams I started flying lessons.  The freedom of the air was wonderful but I was brought down to earth after a short period by two factors.  The first was that it rapidly became clear that given our weather patterns (especially around my local airport – Leeds Bradford) flying was never going to be something I could rely upon as a means of business transport.  Even thoughts of pleasure flying on the few favourable days we occasionally enjoy were also dashed when I found that Civil Aviation regulations would preclude me from wearing my (now essential) hearing aids for the medical I would have to take.  This was frustrating.

But frustrating as it was to learn that I would never take to the skies as a solo pilot, another event was to occur that was far more devastating.

Image courtesy of mistralaviation.co.uk

The business of life Chapter 37 – the joy of closure

Assembled in a meeting room in a hotel close to Newcastle airport early one morning, the two sides eyed each other warily.  We had not met for three years but had fought with all the powers of the law on our side and what had seemed like pure obduracy & guile on our opponents’ part.  It appeared that Clifford had convinced himself that our legal claims would melt away as we failed in the business his father had founded all those years before.The business of life - chapter 37

The plenary session began with both sides facing each other either side of a long table with the law society facilitators at either end.  Both sides had legal teams present comprising lawyers and barristers, all enjoying huge hourly fees whatever the outcome.  The process of spelling out our claim in great detail and at length whilst staring Clifford in the eye was a strange experience indeed.  It was exceeded only by having to listen to what we felt constituted the fairy tale of their defence and counter claim.  The plenary session over we retired to our respective rooms and the shuttle diplomacy began.  The chairman visited each party in turn to ascertain at first hand the reaction each group had to the others’ position.

It was clear that no quick or easy solution was likely to emerge, in fact it seemed that Clifford and Mike were as resistant to a settlement as ever.  Day turned into evening with no progress at all and the session broke up with each group making its own arrangements for dinner.  The next day began and continued all morning with no progress.  I was becoming increasingly irritated by the corporate finance partner from our law firm who could only match the other side’s bluster and seemed intent on ensuring that we ended up in court.  In contrast, Stephanie his manager who had worked closely with me over the previous three years impressed me greatly with her calm efforts to find a solution.

The day wore on in like fashion and Roger, Malcolm and I were becoming resigned to having to endure the costs and uncertainty of resolution before a judge.  I had been casually intrigued by the behaviour of our barrister who for the last hour or so had been ignoring the rest of us and quietly doodling on his pad (or so I assumed).  “OK,” he suddenly exclaimed, “this is how I see things.”  He then proceeded to share his doodles with us, which were actually a matrix of all of the claims and counter claims at stake.  Ranged against each claim was a percentage calculation of the chances of each party winning or losing with his best estimate of the awards and costs each would incur should they win or lose.

The bottom line was the view that we had an almost 100% chance of winning all of our claims.  His view was that Clifford had, at best, only a 50% chance of winning their counter claim.  However, the killer result was that the costs and damages Clifford would suffer as a result of our wins would exceed any benefit from his counter claim succeeding by a factor of about ten.  We called in the chairman who quietly listened, asked a few questions and departed to put this picture before Clifford and Mike.   An hour later he returned and we learned that they had capitulated almost completely.  A couple more hours later we all signed the necessary documents that drew matters to a close (apart from some remaining issues that festered on with HMRC).

As I drove back to Yorkshire that night I reflected on what had happened over the last three years.  Many years previously Clifford and Mike had put in train a course of action that was relatively insignificant at the time but one that had snowballed into major proportions.  I felt it was sheer arrogance and mindless bravado that had brought Clifford into conflict with us, a process that set about unravelling their plan & compounding matters through their refusal to negotiate.  It was clear that Clifford and Mike’s legal team had failed to advise them of the costs they could incur by their actions.  We had won a long, drawn out and bloody battle that had never been of our choosing and had won handsomely.  Strangely, it gave me little satisfaction other than great relief that the whole sad story was over.  I had closure.

Freed of the efforts and frustrations of a long and drawn out legal fight, we threw ourselves back into the challenges of improving our complex new group of three companies.  MSG was our strategic acquisition, the core of our business with, we believed, great potential for highly profitable growth and an ultimate sale.  By the standards of the UK engineering sector it was already a highly successful business (not least due to its non-involvement in the mainstream automotive sector, one we steadfastly ignored).  It had a potential to become even more profitable through an ability to offer unique solutions to demanding blue-chip customers.  We knew that it would take hard work and patience owing to the extremely long leads times required to replace an existing process.  In the case of one of the major customers we won, it took fully ten years.

Trisk and Bison were more tactical (and certainly opportunistic) acquisitions.  Both produced exceptional profits in the first year of our ownership.  If we had then put both businesses up for sale life would have become a lot simpler (a lot sooner).  However, buoyed by the wondrous sound of cash hitting the bottom of the piggy bank and improving PEI’s balance sheet, we pressed on certain that we had hit the magic formula.  From then on matters got infinitely more complex as the cash production machine slowed.

There are long, frustrating stories behind our ownership of both these businesses but I’ll restrict myself to the following brief accounts.

A common feature of both businesses was the quality of management and many of the staff we inherited (courtesy of TUPE).  In both cases, instead of their embracing the change and opportunity brought by new ownership, we had to spend too much time fighting a tendency to revert to the orthodoxies that drove them into administration in the first place.  It was almost as if they believed their failed businesses had been pursuing the correct strategy and policies all along and some freak external event had knocked them temporarily off course.  These tendencies were bad enough but the net effect was to divert our attention from MSG where, with hindsight, we should have concentrated our time and energies.

With Bison, it only took a parting with the MD (son of the CEO of failed parent PLC) and four short years to sell the business in 2003.  We heaved a sigh of relief and moved on.

The situation with Trisk was much more complex.  The company still had technical leadership in infra red paint curing and had also developed ultra violet technology for more demanding applications.  The business was certainly a world leader in its sector and exported to every continent across the globe.  Once we had taken over we saw that Trisk had a number of critical strategic issues.  A major market for Trisk had been the USA where we had a network of commission agents.  Our products were capable of commanding far higher price levels but the agents had learned to sit on their hands ahead of the peak winter demand until our locally based manager panicked and reduced prices.  This was a pattern that revealed itself to be a major problem in many parts of the world.  Attempting to establish a stable and rational pricing strategy proved to be particularly tough due to internal company politics and the weak MD we had inherited with the business.

The other major problem took several years to emerge as the Trisk management either weren’t aware of the shifting dynamics of their marketplace or they ensured that they wouldn’t reveal what they knew (knowing it would require them to change strategy completely).  Trisk had built its initial success on designing and selling IR paint curing systems almost exclusively used for automotive repair work.  These systems were based around an array of IR lamps mounted on relatively simple mobile stands that could be moved around car repair workshops.  Trisk had also adapted the concepts into larger arrays built into custom spray booths.  A major market shift began to make itself felt in the first couple of years following our acquisition.

Legislation was driving the introduction of health and safety and other environmental regulations and these were killing off small repair shops, consolidating the market towards larger and more efficient units.  As this trend continued (fuelled by a succession of mild winters) sales of Trisk’s traditional mobile units declined.  The problem, that took some time to emerge, was that we were not gaining the share of in-booth systems that we should have been achieving.  Booth manufacturers were being involved at the design stage of the new super car repair shops permitting them to specify whose paint curing system was installed.  By the time Trisk personnel got to know about a new repair centre it was already up and running with a competitor’s curing system installed with the booths.

It was clear that Trisk management and sales staff had simply been unaware of this key shift in market dynamics.  Or worse, they had chosen to keep doing what they always did (in their comfort zone) in the hope that it might bring about a return to the glory days.  Around the time that this strategic market shift was becoming apparent, our MD, Tom, came to us with a request to buy the company out from us.  Tired of the short-sighted and intransigent management at Trisk and a need to re-focus our attention back upon MSG, we agreed.  What followed was a disaster that we should have foreseen.  Tom took many months getting funding and putting his bid together during which time he clearly neglected the company.  The bid he put to us ultimately was derisory, was duly rejected and he departed shortly afterwards.

Roger and I became more closely involved in running the business and the strategic issues began to surface.  Trisk’s real expertise lay in the technology of curing paint quickly and effectively and it was a world leader in this field.  The actual delivery systems were secondary but it was vital that Trisk became involved in ensuring their systems were specified at the design stage of the spray booths.  We recruited a marketing manager to research the market, promote and co-ordinate the use of Trisk technology into booths.

We also looked to see where else the technology could be most effectively employed.  It didn’t take long to discover that the servicing and repair of commercial aircraft was a potentially hugely profitable sector.  The leading edges of wings and tailfins had to be resprayed on a scheduled basis but the paint curing systems used were slow and expensive.  Trisk’s solution could eliminate days of aircraft downtime saving thousands of pounds for the operators.  With these two strategies in place, we employed an aerospace expert and a new managing director.

Sadly, our new MD transpired (despite an apparently strong CV and significant technical qualifications) to be completely ineffective and I had the task once more of seeing an MD off the premises.  It became clear that the sales and marketing team were not being successful in either ensuring specification of Trisk technology into new booth installations nor were they taking the action we had agreed to improve pricing.  Despite diverting major time on the part of our local MSG US manager towards assisting Trisk, the distribution problems there remained.  The fledgling aerospace business was still struggling to break through and gain aerospace approvals.  Our aerospace manager resigned taking up a more mainstream role in the sector.  Despite investing huge amounts of our time the team never seemed to have their heart in stepping out of their comfort zone and taking the necessary action that would turn the business around.

Looking back, Roger and I had believed in the business and had pushed hard to effect the changes that we believed would turn its fortunes around.  Our experience once more had been of ineffective management that we had inherited (and subsequently employed).  Buying both Bison and Trisk had stretched our management capabilities to the limit.  I still believe that we could have made a success of Trisk had we been able to concentrate solely on that business.  Both businesses had initially contributed strongly but we should have sold both within a year.

Although 3i had never overtly pressured us to sell PEI we did experience attempts at ‘persuasion’ occasionally and around this time a fresh ‘persuasion offensive’ was made.  Roger, Malcolm and I discussed the situation and decided that we would put the entire PEI business up for sale.  MSG had been performing well, our debt had been significantly reduced and we would be glad to see the end of Trisk.

Could we find a buyer for the whole business?  Would we receive offers that would reflect the value we had built in MSG?

 Image courtesy of careers.guardian.co.uk

 

The Business of Life Chapter 36 -it’s not just the business risks

Roger was taken seriously ill over the Christmas holiday 1998 and admitted to hospital with crippling back & chest pain.  Following MRI scans and blood tests he was diagnosed with an MRSA infection in his thoracic spine.  The affected vertebrae had all but collapsed, were partially fused, trapping nerves and were the cause of the excruciating pain he was suffering.  No one knew the source of the infection or how it came to lodge in his spine but it seemed life threatening at worst and incapacitating at best.  Whilst Roger was being pumped full of a cocktail of the most powerful antibiotics I pondered our situation. When it's not just the business you have to fear

 The illness could not have come at a worst time.  Our dispute with the vendors of MSG had reached the stage where a court action seemed inevitable and with the only certainty that we would be spending vast sums more to fuel the action.  I had been overseeing the detailed investigative work inside the company and liaising with our legal team.  I could ensure that our claims continued to be pursued with vigour but there was a peak of activity occurring simultaneously on a number of fronts.

A few months earlier one of our minor customers had been placed into administration.  The loss to MSG was small but the business itself was interesting.  The company concerned was Trisk, a world leader in infra red paint curing equipment for the automotive after market.  Situated only a few miles from us in Sunderland, it had enjoyed explosive growth with the founder recently receiving the accolade of North East Businessman of the Year award.  Unfortunately, a combination of poor strategy and uncontrolled spending had run the business into the ground resulting in the management being replaced and the bank appointing an administrator as soon as they had recovered their overdraft.

 The other aspect was that Trisk was also a 3i investment.  Although they had no hope of recovering their original investment they assured me that they would be supportive of an acquisition by us.  Prior to Christmas we had met with the administrators and the new management at the Trisk headquarters.  The new team had all been promoted from within and, whilst lacking experience, seemed supportive of our efforts to acquire the company.  However, there were a number of other parties interested including the largest competitor, Hedson of Sweden.  We were fully engaged in negotiations when Roger was taken ill.

Our efforts to locate at least one suitable acquisition candidate in our own engineering sector had come to nothing.  Having scoured our industry, had meetings with owners and analysed many sets of accounts, we came to the decision that there was not a competitor worth buying.  With the exception of a single piece of equipment (that we subsequently acquired for very little) none even had assets worth acquiring.  It was also quite clear that our competition fought with only one weapon – price.  They competed with each other for components that had always been made by the spinning process simply driving down price in the process.  The result was that margins in all of the competition were slender to non existent.

Following our strategic review we had identified that any new major business to be targeted would have to be conversion from alternative metal forming processes.  It was apparent to us that we could offer significant technical advantages for industrial applications where the risk of failure in life had to be eliminated.  This was a risk in particular (and demanding) applications where components had been made using alternative metal forming processes.  Companies were prepared to pay heavily for a process that eliminated these risks.  As the result of our new strategy, Roger had targeted the medical division of one of the largest industrial companies in the world.  Within hours of his contact they had put an engineer on a plane from the USA to meet with us.  Now, they had followed this up with drawings for a set of major components for one of their products.  The only person with the engineering skills to lead the investigation into how we could produce the components was Roger.

When I went into the hospital the following day to discuss how we might make alternative plans, I found I had been beaten to it.  Drawings were strewn across Roger’s bed and a small team were assembled around him.  “If I don’t do it, no other bugger can.” growled Roger in his inimitable manner.  He proceeded to lead the team that developed our ultimately successful solution from his hospital bed in the weeks that followed.  Samples were produced, shipped to the US and soon approved.  Unfortunately, despite our superior solution (and the winning of an internet auction) we fell foul of internal politics and it was to be several years before we became a regular supplier.

The infection that had laid Roger low was finally pronounced clear but it was to leave him with subsequent and recurrent problems that continue to this day.  Somehow he would shrug the problems off and battle on displaying a level of fortitude and perseverance I have never witnessed before or since.   It soon became apparent that to pursue these strategic opportunities required investment in new equipment that was capable of producing the power and tolerances required for the demanding, new work.  Over the next few years we acquired two of the largest CNC spinning lathes in Europe (capable of spinning components up to 5 metres in diameter).  These were followed by smaller state of the art spinning machines, water jet cutting, high speed plasma and a robot.

Our bid to acquire Trisk was successful, beating off our Swedish competitor.  Getting to know our new business and repositioning strategy proved to be a time consuming process.  However, we quickly had the business back into profit and started looking for fresh opportunities.

In another serendipitous turn of events we suffered a further minor bad debt when a second of our many MSG customers went into administration.  The company, Bison IBC Systems in Bradford, produced UN standard intermediate bulk containers for the transportation and storage of hazardous chemicals.  It was a leader in its field and had a strong reputation for quality.  However, once again we found a company that had been mismanaged, although this time it was through the activities of its parent company.  Following protracted negotiations we bought the assets of the business later in 1999.  A similar pattern occurred as with Trisk and profits started to flow shortly after our acquisition.

 By the end of that financial year both new acquisitions had made strong profits and, combined with our MSG business, we produced an extremely strong result for our holding company, Precision Engineering International (PEI) which we held jointly with 3i.  We now owned a portfolio of 3 industrial companies, each a leader in its sector.

Pleased with our track record, 3i positively encouraged further acquisition activities.  As a result I received a copy of their entire engineering and manufacturing portfolio (over 500 companies) together with an open invitation to consider any of these for acquisition.  Detailed investigation made clear a couple of things to me.  The first was that it was extremely satisfying to discover that we were one of their top performing investments in these sectors.  The other aspect was learning that they were quite amenable to turning over an investment with a fresh set of partners they considered could produce a higher return.  However, despite spending a great deal of time in further research and analysis there was no obvious target for us.  Shortly afterwards, another problem was sprung on us.

When I set up the funding to acquire MSG I had sat through a ‘beauty parade’ of banks (something that might reasonably be called an oxymoron).  The bank that offered the lowest lending rates and the most attractive deal was Allied Irish.  It seemed that they wanted to become involved in supporting VC backed deals and were anxious to become involved with 3i, hence their better than average offer.  All had gone well for several years although it was clear from various meetings that they knew little about manufacturing and less about engineering.  Nevertheless it was a shock when they turned up one day that year and said they were calling in their millions and we would have to refinance.  When pushed for a reason they claimed that they really didn’t understand our sector and were going to concentrate on property, a sector where they had real expertise.  Well, we all now know how that one worked out for them!

We refinanced easily with HSBC and that relationship worked well for a number of years with further lending to support our growing capital investment programme at MSG.  Until that is, they decided to replace their extremely knowledgeable regional director for someone who knew about as much about business as Allied Irish (perhaps less).

In 2000 another significant event took place.  Our claim against the vendors of MSG and our defence against their counterclaim had been consuming vast amounts of my time and we had already run up massive legal fees.  With all legal avenues exhausted, I had prepared for a full hearing with a brief to a very experienced barrister in London.  We were convinced we could win our case and this meeting reinforced that view.  The process had become more and more fraught as a result of constant rejection by the vendors of each and every attempt we made to resolve the matter and obstruction of our investigations.  It didn’t help that Clifford had a reputation as a blustering bully whose usual line of defence was attack.

Nevertheless, in one last attempt to avoid the additional time and expense of a trial we made a proposal to the vendors to join with us in the Alternative Dispute Resolution (ADR) process.  To our great surprise we learned that they had agreed to this process.  The stakes were very high.  We had already sunk a large six figure sum into legal and investigative fees in the previous three years but there always has to be an element of risk and uncertainty in legal matters.  Even the ADR process didn’t come cheap with barristers in attendance on both sides.

 Some weeks later I sat across the table from Clifford with our respective teams ranged around us.  It was the first time we had met since we bought the business three years previously and in that time I heard he had suffered a stroke.  Would illness have mellowed him or would he be as obdurate as ever?  Could we reach a settlement and put an end to the vast drain on time and expense?  Or was this just a futile exercise?

Image courtesy of gastroenterologyupdate.com.au

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

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 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.

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