Tag Archives: Forecasting

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 38 – when a dream goes sour

“I’ve lost my job!” were the first words David uttered when he turned up to see me in early 2002.  David and I had known each other for well over twenty years, since our time in the lighting industry running competitor companies.  Despite the intense rivalry between our organisations we had always enjoyed each other’s friendship when we met at industry functions.  We had lost touch with each other when David had moved to the south for a new role but he had recently relocated back to Yorkshire again.  We spent time together discussing what had happened and the options David had for his next career move.

Our business crest & motto “Strength through knowledge”

It was some months before I met David again, but when he came calling it was to set my career off in a new direction and widen my portfolio of roles still further.  “I’ve got an idea for a business.” was David’s greeting that second meeting, “Are you interested?”  He went on to say that he had paid a large sum of money to sign up with what claimed to be a not for profit organisation that provided re-training for executives wishing to move into business consultancy.  David’s view was that the course he had attended had provided poor value for money and he believed we could do far better in setting up our own competing service.

I was noncommittal that first day but said that I would research the sector and see if the concept of a competing business made sense.  I went through the process of producing a draft business plan.  After reviewing the company in question, all similar businesses and the Small and Medium Enterprise (SME) sector I came to the view that, given David’s recent experience, we could well put together a superior service.  When I added in our respective experience and skills I became convinced that this was a viable proposition.  I met up with David once more, took him through my findings and we quickly trashed out the actions required to get our new business started.

Within a short period I had registered a company (The Academy of Business Consultants), obtained a VAT registration, taken out the required insurances, produced a corporate identity, leaflets and business cards, created and implemented a website and sketched out a marketing and operations plan.  I was driven!  Working with David proved to be extremely productive as we found that we had a synergistic effect upon each other that made creating concepts and resolving problems a simple and enjoyable process.  Within six months of our initial discussions we had our business and launch plans complete and placed the first advertisement of our advertising campaign in the Sunday Times.

The concept we had developed involved refining the enquiries we received from the advertising campaign, getting the candidates to complete an online personality profiling questionnaire and inviting them to an evening seminar.  During these seminars we would outline a genuine array of career options open to them, present a profile of the SME sector and its needs, pitch our training course concept and provide valuable feedback on their behavioural preferences and how these might impact upon future roles.  The responses we received to the advertising were good and we ran seminars in the North, Midlands and London.  However, despite receiving healthy attendance and strong interest it quickly became apparent that we had a failure on our hands.  We had encountered an insurmountable problem.

We had offered a better and more relevant training programme, set our price at a more attractive level and matched the offering of refined leads and continuing support to those completing the training programme.   There was, however, a critical element of our main competitor’s offering that clinched business for them but one we had chosen not to follow.  One of the key factors that invariably clinched the sale for our competitor was an ‘income guarantee’.  Having reviewed the documentation that David had been given it was clear that the guarantee was all but worthless, so hedged around with conditions and procedures that it was almost inconceivable that anyone could succeed with a claim.  Little wonder that they boasted that they had never had to pay out!  We decided that it would be unethical to match this misleading offer and we changed the direction of our business.

Whilst David had found that the ‘hot leads’ he had been provided by our competitor were at best on the tepid side of stone cold he had, nevertheless, succeeded in building a strong client base of his own.  An interesting and resourceful turn of events had been David’s success in persuading a local firm of chartered accountants to sub-contract the provision of business advice for clients to him.  This experience had led him into a similar arrangement with other firms.  The accounting firms were all members of a national marketing membership organisation (we’ll call them XYZ) that provided help and assistance to members to enable them to run a better business.

We knew from research conducted by Strathclyde University that accountants were the most trusted source of advice amongst private business owners.  However, David’s experience was that beyond the traditional areas of accounting and tax, most small and medium sized accounting firms shied away from offering other forms of business related advice.  “Why don’t we offer our business advice service to more of XYZ’s members?” I suggested. “They obviously see the commercial wisdom of offering advice to clients but don’t feel confident or expert enough to do so themselves.”  David agreed and this was the genesis of our new business venture.

I joined David (in my ‘spare time’) in widening the number of firms we approached and we quickly succeeded in winning further clients amongst the members.  Convinced that the service we were providing was potentially of real value to XYZ, we decided to approach them.  This was not a simple matter and it took many attempts over six months before we sat across a desk from one of the two founders.  The meeting went well and we came away with an agreement to trial our service to a sample of their members.  We recruited another highly experienced business advisor to join us and once again proved we could deliver results.  Some months later the trial was extended to a further region and the results continued to improve.

A short way into our extended trial the three of us started to uncover the same situation time and again.  It was the practice owner rather than their clients who was in most urgent need of face to face business guidance and support.  Despite being highly qualified and experienced chartered accountants the vast majority of practice owners lacked the wider business skills to get the most from their teams and their clients.  The answer we soon implemented was to commence a coaching programme with the practice owner in addition to our work with their clients.

We had implemented a client satisfaction feedback process whereby our researcher, interviewed every practice owner and client we worked with following a set period.  The feedback we received was invaluable and showed our service to be rated either first or second out of the whole XYZ offering.  It also enabled us to take corrective action where required and ensure that our service continued to meet members’ needs.  We also fed back the results to each associate and the XYZ management.  The change of direction was extremely successful and led to a real breakthrough when XYZ asked us to provide a national service for every new member they recruited.  We then formed a new company with XYZ as partners.  Given that we were now about to create a business with effectively a sole customer, we argued that such a shared destiny required a reciprocal shareholding in XYZ.  We were not successful in this but settled for the right to attend and participate in their board meetings.

Faced with a national launch far beyond the geographic capabilities of three of us we started an intensive recruitment campaign to cover the entire UK.  Within a short period we assembled and trained a team of 20 associates, each of whom had previously held at least one role as MD or chairman.  Ironically, each of these new associates had been uncovered via our previous competitor’s online network!  Based on the experience that we had gathered from our existing work, our model was based upon a mix of coaching and mentoring.  We knew that pure coaching methodologies (the coach questions and the coachee provides their own solutions) can provide strong results.  However, our own experience showed that a combination of coaching blended with appropriate guidance (based on the vast experience of our associates) enabled a time-efficient and professional solution.

By this stage I had been running businesses for thirty years and been an owner of various different organisations for ten.  These organisations had been many times larger than the one David and I had created and they had given me rich and varied experience.  But having created a successful organisation together from the failure of our initial concept was richly and uniquely rewarding.  To start and build a successful business is something really rather special.  We were now helping many business owners and their teams to be more successful as organisations and more fulfilled as individuals.  David and I had continued to make a truly synergistic team where difficulties were merely fresh challenges to be overcome.  With David’s superior interpersonal skills and my research, analysis and organisational work we were a powerful team.

David and I also worked closely with our new partners, resulting in an initially a strong relationship.  However, management changes took place within their organisation after a couple of years and differences of opinion started to emerge over strategy.  As time moved on I found that I was spending more and more time attempting to negotiate a resolution of these differences.  I became to realise that the rich feelings of satisfaction with our business that I had enjoyed so much had all but evaporated.  I could see only opportunity squandered and a loss of personal freedom stretching ahead.  A concept that both David and I had planned to run on into retirement had become something from which I could no longer derive satisfaction.

Following lengthy discussions over the situation we both seemed to realise that events had changed so much that we could never recapture the fun and satisfaction we had previously enjoyed.  Subsequently, following discussions with our partners, an offer was made to buy out my stake in the business and in 2010, after 8 great years working with David, I departed.

Reading over this last chapter I realise that it ends on a very low note but that accurately reflects the way it felt at the time.  There is a very much more complex story that I have abbreviated into a few short paragraphs but legal reasons preclude me from going into greater detail.  I really missed what David and I had created but time and circumstances had moved on and I had to do likewise.

David continued to run the business with our previous partners for another two years until the situation changed once more and the contract was terminated.  He is now continuing to offer business coaching and advice to a much wider spectrum of professions and still working with most of our previous associates.  I wish him every success in what remains a valuable endeavour.

We had succeeded in building this business together whilst I was still heavily involved in the running of ABC, Trisk and Bison as well as chairing Hallamshire.  I still don’t know how it all fitted together into 365 day years – perhaps the extra day in leap years helped.  And yes, whilst I was having fun in all these businesses, there was always the time I spent each week in Newcastle with the big investment I had made in Metal Spinners Group.  And events there were becoming ever more involving.

Less than a month after my departure an event took place in Newcastle that was to have far reaching implications.

 

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 31 – the gathering storm

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

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

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

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

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

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

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

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

With the glow of success (or it might have been champagne) still infusing our faces the following morning, we took control of the business and set about reviewing our new company.  Bridgestream traded from eight warehouses across the Midlands and Southern England, supplying a wide range of chemical and consumable products into two discrete industrial markets.  The business was trading profitably (albeit on narrow margins) but had high overheads in terms of both premises and staff.  Our business plan included achieving major savings by consolidating down onto a single site; this would also have the advantage of operating with reduced inventory whilst improving customer service.  During the remainder of the first week, I visited most of the sites, which served to confirm the urgency of the plan.

The first bombshell came with my return to the office to find an extremely concerned looking Richard in his office with the management accountant.  “ We’ve been screwed.” Richard announced to me.  In contravention of the terms of the sale and purchase agreement the vendor had cancelled all of the previous month’s payments to creditors.  The effect of this was to deprive Bridgestream of the major portion of the working capital we had relied upon.  I agreed with Richard that an overhaul of the accounting systems was vital if we were to have accurate information.

The situation was compounded when we also discovered a few days later that in settling an intercompany debt pre-completion between Bridgestream and its sister company (remaining with Offhand), a large over-payment had been made.  The net effect was now a hole in our working capital of well over half a million pounds.  This was a situation that moved us from being seriously injured to virtually crippled.  Richard quickly spoke to Offhand who made soothing noises over the matter and promised to look into the situation.  We hastily re-ran our cashflow projections and calculated that, with changes to our payment terms and some savings we could make we might survive; but we needed that cash.  Now.  The next call was to our lawyers.

Despite many calls to Offhand, no payment was forthcoming, so on our lawyers’ advice, we instituted proceedings against him for breach of contract.  Offhand’s reaction was to issue a counterclaim claiming repayment of the deferred consideration.  As the months dragged on I attempted to engage Offhand in an Alternative Dispute Resolution (ADR) process but despite agreeing he never showed up for a meeting.  One of our managers still in contact with Offhand reported that he had no intention of paying as he believed we couldn’t afford the legal costs to win our action.  The legal processes rolled on and our costs duly rose.

Meanwhile, the cash situation was not improving.  We were surviving but barely and the prospects of a new loan to compensate were zero.  Towards the end of that first year, the directors all agreed to reduced salaries.  Richard had previously agreed to replace the management accountant (we had acquired with the business) as he was, in Richard’s own opinion, simply not up to the job.  The months dragged on but no change took place, Richard always having one excuse after another to delay making a change.  It also became apparent that our invoice financing company were reducing their advances to us, having the effect of stressing our finances still further.  A meeting with their management revealed their concerns over the credit worthiness of many of our customers.  Richard promised a major drive to improve debt collection.

Richard had started giving me growing cause for concern over this period.  He was increasingly absent from the office, ostensibly improving sales but instead he frequently met with one ‘snake oil salesman’ after another and came back full of his latest ideas for additional (and wholly inappropriate) new product lines.   The monthly accounts were increasingly late for our board meetings and appeared to be showing profits whilst we were bleeding cash.  After another board meeting when we were again without full accounts, I called off the meeting and met alone with Richard.  What followed were, hopefully, the most difficult couple of hours of his life.  I covered all of his shortcomings, his continued failings to take corrective action despite commitments, inappropriate sense of priorities and his duties as a director and informed him I required a programme of specific actions over the next month (through to our first year end).

Over the next couple of months we set about the site consolidation process.  We finally found suitable premises, close to the centre of the country and the motorway network and, after careful planning on Tim’s part, we made the move over one hectic, weekend.  The long awaited reduction in stock levels finally started showing benefits and along with the staffing reductions our overheads would come down (after the effects of the redundancy payments had fed through).

Yet another turn of the screw came when the financing company rewarded our stock reduction programme with a corresponding reduction in their advance.  The promised sales improvement failed to materialise and combined with our reduction in stock financing we were seeing no improvement in cashflow.  Richard was pleading the need to concentrate on finalising our year end accounts (which we were under pressure to produce) and had still not replaced the management accountant (saying now that he had great loyalty).  I was forced to give him additional time to achieve the commitments he had made to me.  Richard shortly afterwards produced management accounts showing a break-even position at the year end.  He also promised that the cash situation would quickly improve and that, now the move was complete, we would see real benefits.

Some weeks later my mobile rang with a devastating call from our major supplier.  I learnt in a very difficult conversation that Richard had reneged on a previously agreed payment schedule and was now avoiding calls.  He informed me that all confidence in Richard was exhausted and was going to close the account.  I promised immediate attention to the issue and asked, on my personal surety, for additional time to resolve matters.  By this time I had also gone many months without payment of salary and other business expenses I had incurred.  The following day I was due to meet with Richard and Tim at KPMG’s offices for the audit meeting, so I decided to delay any conversation until we could meet face to face.

The information from our audit partner was worse than I could have imagined.  The year-end break-even result Richard had reported (critical to the continued support of our financing company) was in fact a very large loss.  Furthermore, we were informed that the firm had never seen an accounting system in such a mess.  Richard bumbled on making a series of ludicrous excuses whilst I sat and tried to configure a plan.  The first step had to be to remove Richard; not only was he past the point at which he could recover any credibility, it was clear that he was utterly incompetent.  I made suitable excuses and left to start moving things forward.

 My first action was to meet with our VC partner to bring him up to speed and gain his agreement to the action I was proposing.  I then had a meeting with our lawyers to review the terms of Richard’s contract.  They agreed that the situation constituted a serious enough breech of his duties to warrant dismissal without compensation.  That left the issue of Richard’s equity, which was literally under water and without value.  Under the terms of his contract if he left the company he was required to sell the equity back to the company at an agreed valuation.  In an act of generosity I set a valuation at a nominal sum.  I called Richard and set up an extraordinary board meeting for a couple of day’s time.

What followed was the hardest task I have ever had to undertake in business.  It had fallen to me to fire more than a few people in my time but to take away someone’s dreams and their life’s savings at the same time was not something to relish.  In the event a usually verbose Richard was stunned into silence save for a few monosyllabic replies.  I escorted him whilst he cleared his office and saw him off the premises.  Later that night he returned blind drunk and hurled two pallets through the front office windows.  The exercise of power can be a sobering experience.

Could we save the business?  

 Image courtesy of viralblog.com

 

The Business of Life Chapter 30 – trust and integrity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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